Greenbook Toolkitguide170707 PDF

Public Sector Business Cases using the Five Case
Model: a Toolkit
Authors:
Joe Flanagan
Paul Nicholls
Contents
1: Foreword
2: Authors introduction
3: Who should read this publication?
4: Why is the business case important?
5: Overview of the business case development process
6: Responsibility for producing the business case
7: A systematic approach to the development of the business case
Stage 0 Business planning
Phase 0 determining the strategic context (Strategic Outline Plan SOP)
Step 1: ascertaining strategic fit
Stage 1 Scoping
Phase 1 preparing the Strategic Outline Case (SOC)
Step 2: making the case for change
Step 3: exploring the preferred way forward
SOC review criteria
Stage 2 Planning
Phase 2 preparing the Outline Business Case (OBC)
Step 4: determining potential VFM
Step 5: preparing for the potential deal
Step 6: ascertaining affordability and funding requirement
Step 7: planning for successful delivery
OBC review criteria
Stage 3 Procurement
Phase 3 preparing the Full Business Case (FBC)
Step 8: procuring the VFM solution
Step 9: contracting for the deal
Step 10: ensuring successful delivery
FBC review criteria
8: The use of workshops for the development of the business case
9: Common causes of project failure and their remedies
10: Business case content and structure
11: The systematic approach to the preparation of business cases: overview
of steps and actions for SOP, SOC, OBC and FBC phases
Glossary
Bibliography
1. Foreword
Investment in the public sector has been increasing in recent years, and will
be continuing into the future. A vital part of the work of investment is the
scrutiny, via business cases, of what is proposed to ensure that it is the right
sort of investment, affordable, and value for money. Business case
preparation is a complex and often costly task, where organisations find
themselves reinventing the wheel despite the range of official guidance that
is widely available.
The publication of this Toolkit to the Business Case Production Process will
assist all investing organisations in producing their business cases. It will, if
used properly, help cut the cost of the consultant support that is often
necessary, thus saving money to projects. Almost more importantly, the
guidance will help anyone involved with, or overseeing, a project to
understand the work that is necessary genuinely to prove a case for
investment. This will enable a business case to become what it should be
not a bureaucratic necessity in order to obtain approvals, but a document
demonstrating evidence-based decision-making.
I have seen a wide variety of business cases, and know from experience how
equally widely they can range in quality. This Toolkit will act as an
invaluable support to developing the contents and purpose of a good-quality
business case.
Peter Coates
Deputy Director of Finance Investment
Department of Health
The public sector in the UK invests vast sums of money each year on new or
replacement assets such as land, buildings, equipment and facilities. In
Wales, we invest 1.6 billion each year. With so much demand for capital
investment it is essential that we make the right choices and can
demonstrate value for money.
A good business case provides an organisation with the evidence to support
their decision making and provides assurance to other stakeholders that
they have acted responsibly. Although they tend to be associated in some
peoples minds with large scale investments or service redesigns, business
cases are equally relevant and just as important to smaller projects or
developments. The common factor linking them all is that the business case
process must involve close scrutiny of all relevant financial and nonfinancial aspects of a proposed project to ensure that the best possible
solution is selected for a given set of circumstances.
This guidance provides a systematic and objective approach to all stages of

the business case process that sits alongside and complements HM
Treasurys Green Book guidance. I am confident that its use will not only
help enhance the quality and consistency of public sector business cases but
will also increase the value for money achieved as a result.
Dr Christine Daws
Director of Finance, Welsh Assembly Government
2. Authors introduction
This guidance consolidates other reference sources and takes the business
case author through the entire process from SOP to SOC, OBC and FBC. The
guide is accompanied by a set of templates, prepared following many years
of practical experience within a wide range of public sector organisations. It
covers the content, presentation and structure of the business case and the
standards which need to be applied.
This guidance must be read in conjunction with the Treasury Green Book
and relevant Departmental Manuals.
Our aims
We have prepared this publication and its accompanying templates with the
following aims and VFM principles in mind:
first economy to reduce the costs and timescales associated with

the production of business cases
second efficiency to increase the throughput of worthwhile
schemes at their key review and approval stages
third effectiveness to ramp up the quality of proposed schemes,
both in terms of their scoping, planning, procurement,
implementation and evaluation; and their structure and presentation.
The potential benefits

The potential benefits from following this guidance are considerable if one
considers that there are currently some 900 public sector organisations,
typically each planning and procuring around 10 key investments each year.
This equates to a total of some 27,000 SOCs, OBCs and FBCs, which at an
average cost of 50k to produce (taking account of internal and external
resources) equates to a conservative cost of over 1.35 billion spent on
business cases within the public sector each year.
Use of this guidance will considerably reduce the associated in-house and
external consultancy costs of producing business cases to the required
standards. Consequently, through the use of this guidance and its supporting
templates, we envisage savings of at least 15 to 25%, or some 250 million
per annum. Please help us in this endeavour by adopting the guidance and
providing feedback, as appropriate.
Acknowledgements
We would like to express our sincere thanks to:
Dr Christine Daws, Director of Finance at the Welsh Assembly

Government, for having the foresight to commission this project in
the first place
Joe Grice, whilst he was Chief Economist and Director of Public
Services at HM Treasury, for the latest version of the Green Book,
without which this guidance would be incomplete.
Joe Flanagan
Director of Investment Policy and Appraisal Group (IPAG)
Department of Health and Social Services (DHSS)
Welsh Assembly Government
Paul Nicholls
Managing Director
Open Business Consulting
3. Who should read this publication?

Business cases are a mandatory part of the planning, approval, procurement
and delivery of investments within the public sector.
The Five Case Model is the Office of Government Commerces (OGC)
recommended standard for the preparation of business cases and is used
extensively within central government departments and their agencies.
It is referenced by HM Treasury in the latest version of the Green Book and
recommended by the Department of Health for the preparation of service
related procurements in the NHS England; and mandated for both service
and capital related schemes in the NHS Wales. It will also be of considerable
interest to the NHS in Scotland and to other public services.
This publication provides an overview of:
the business case philosophy

the product the Five Case Model
the recommended process based on many years of practical
experience.
It should, therefore, be read by key personnel involved in the development

of these schemes. This includes:
Senior Responsible Owners (SROs), Programme Directors and Project

Managers, with responsibility for the successful delivery of schemes
Directors of Finance, Procurement and Planning, with responsibility
for the forward planning of operational aspects of schemes
Members of the Management Board (Chairman, non-executives, the
CEO and other directors), with strategic responsibility for approving
the scheme through the life span of its development and delivery.
This guidance is provided in accordance with HM Treasurys Green Book (a

Guide to Investment Appraisal in the Public Sector) and the Capital
Investment Manuals for the NHS in England, Scotland and Wales.
This guidance should be read in conjunction with the templates for the
development of Strategic Outline Programmes (SOPs), Strategic Outline
Cases (SOCs), Outline Business Cases (OBCs) and Full Business Cases (FBCs)
using the Five Case Model. There is also a template for business
justifications for small and medium sized investments. All are published as
a set by the HFMA.
4. Why is the business case important?

Much has been written about this
The fact is that too often, too many strategies, programmes and projects in
the public sector fail to achieve their objectives and deliver anticipated
benefits because the key phases of the investment have been inadequately
scoped and planned and the associated risks have not been taken into
account.
The business case is so important because it is the planning and
management tool which enables stakeholders, customers and delivery
personnel to ascertain that schemes:
are supported by a robust case for change that provides strategic

synergy the strategic case
optimise value for money the economic case
are commercially viable the commercial case
are financially affordable the financial case
are achievable the management case.
The business case is not simply a vehicle for gaining approval for a scheme.
Irrespective of whether approval is required, the above components need to
be satisfied for all public sector schemes.
The development of the business case takes place over time, and
sequentially in relation to the above five key components. At each
iteration, further detail is provided, resulting in the production of the SOC;
the OBC and finally the FBC.
5. Overview of the business case development process

Introduction
The development of a scheme must be grounded in terms of a strategy or
business plan. We refer to this as Phase 0.
Phase 0 and the subsequent three phases which relate to the development
of the business case over its lifespan (SOC, OBC and FBC) are presented in
sequence within this Guide. They total 10 main steps, with 35 supporting
actions described in the main text and summarised in section 11.
Background
The process is iterative. Thus, as the business case is developed, it is always
necessary to review previous steps in order to verify the continued efficacy
of work undertaken in the earlier phases.
The process is also flexible the quantity and depth of the work undertaken
needs to be tailored to suit the requirements of the individual scheme.
Finally, we have shown how the process maps onto the OGC Gateway
Process, which is now mandated for all programmes and projects within
England (by OGC); Wales (by the Welsh Assembly Government); Scotland (by
the Scottish Parliament) and Northern Ireland (by the Northern Ireland
Assembly when in operation).
Phase 0 determining the strategic context
This is part of the business planning stage, where the position of the
proposed project is determined in relation to the overall strategy and/or
programme.
This phase maps onto the preparation of the project initiation document
(PID) in relation to PRINCE 2 project methodology and onto the OGC
Gateway 0 strategic fit.
The preparation of a Strategic Outline Programme (SOP) should be
considered where the definition of the project in relation to the programme
and overarching strategy is unclear or uncertain.
This is the scoping stage of the investment.
The purpose of the SOC is to confirm the strategic context of the
investment; to make a robust case for change; and to provide stakeholders
and customers with an early indication of the proposed way forward (not
the preferred option), having identified and undertaken SWOT analysis on a
wide range of available options, together with indicative costs.
9
This phase maps onto OGC Gateway 1 business justification.

This is the detailed planning phase of the investment.
The purpose of the OBC is to revisit the SOC in more detail and to identify a
preferred option which demonstrably optimises value for money. It also sets
out the likely deal; demonstrates its affordability; and details the
supporting procurement strategy, together with management arrangements
for the successful rollout of the scheme.
This phase maps onto OGC Gateway 2 procurement strategy.
The project moves into its procurement phase following approval to
proceed.
This takes place within the procurement phase of the project, following
detailed negotiations with potential service providers/suppliers prior to the
formal signing of contracts and the procurement of goods and services.
The purpose of the FBC is to revisit the OBC and record the findings of the
subsequent procurement. It also sets out the recommendation for an
affordable solution which continues to optimise VFM, and includes detailed
arrangements for the successful delivery of goods and implementation of
services from the recommended supplier.
This phase maps onto OGC Gateway 3 investment decision.
Following FBC approval
Following FBC approval it is important to note that the business case
continues to play a major role in the life span of the project. This includes:
internal and external audit

operational management the risk management register
OGC Gate 5 (benefits realisation) the benefits register
post project evaluation
Public Records Act and Freedom of Information Act.
10
Overview
With each phase there are a number of different steps, which are shown
below:
Stage 0 Business planning
Phase 0 determining the strategic context (Strategic Outline Plan SOP)
Step 1: ascertaining strategic fit
Gate O: strategic fit
Stage 1 Scoping
Step 3: exploring the preferred way forward
Gate 1: business justification
Stage 2 Planning
Gate 2: procurement strategy
Stage 3 Procurement
Gate 3: investment decision
Stage 4 Implementation
Gate 4: Go Live
Stage 5 Evaluation
Gate 5: benefits realisation
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6. Responsibility for producing the business case

The ownership of the investment planning process (for which the business
case represents the key repository for information) must reside and remain
within the organisation, which in the case of significant investments
should appoint a Senior Responsible Owner (SRO) for the projects direction
at board level, as recommended by the OGC Gateway Process.
Under no circumstances should responsibility for the direction and the
production of the business case be outsourced to external consultants.
However, external consultants may be of invaluable assistance and their use
should be considered where the necessary skills and resources are not
available in house.
Similarly, the production of the business case should not be regarded as an
adjunct to the project managers role, and a hurdle to jump for approval
purposes. Instead, it must be viewed as a fundamental part of the overall
business planning process, which requires advice and guidance from the
business managers, users and technicians involved in the scheme.
12
7. A systematic approach to the development of the business case

Stage 0 Business Planning
Phase 0: Determining the strategic context (the SOP)
Step 1/ action 1: ascertaining strategic fit
The need for the project is often perceived as being obvious. However, a
project should never be taken forward without asking why it is needed in
relation to:
other projects in the programme investment portfolio

other programmes within the overall strategy.
A strategic review is required if the answers to these two points are not
readily apparent. This is particularly important in the context of the OGC
Gateway Process (Gate 0) which, in some cases, has found that whilst a
project may be worthwhile, it could best be rolled out as part of another
project or programme due to related synergies and holistic fit.
The action required within this step is shown in context below:
Stages
Development process
Phase 0
Step 1/ Action1
Output
Outcome
Review point
Determining the strategic context

Ascertain strategic fit
Strategic Outline Programme (SOP)
Strategic fit
Gateway 0 strategic fit
Deliverables
Strategic context
Strategies, programmes and projects

Strategies, programmes and projects are all components of the business
planning process, which together provide the structured framework for
defining and implementing change within the organisation, either at
national, regional or local level.
Strategies focus on the vision, mission and long-term goals of the
organisation. Programmes provide the vehicle for implementing business
strategies and investment initiatives through the management of a portfolio
of projects that provide organisations with the capability to achieve
benefits that are of strategic and operational importance.
It is important to recognise that strategies incorporate a number of
programmes, which will individually be made up of a number of projects,
each of which requires a business case.
13
The business strategies, programmes and projects within an organisation

must all be aligned and the critical path understood in terms of timescales
and deliverables. This is shown below:
Component
Time horizon
Deliverables
Strategy
Programmes
Projects
Long-term
Medium-term
Short-term
Goals ongoing
Outcomes benefits
Outputs building
blocks
It is important that all large programmes and projects have discrete end
dates and recognised programme and project management methodologies in
place for their successful delivery.
Strategic reviews
The general purpose of the strategic review is to revisit the accepted
answers to the following questions:
where are we now?

where do we want to be?
how will we get there?
This involves:
reviewing the strategies, programmes and portfolios of projects in

place within the organisation to make sure that they fit together in
terms of their scope, milestones, timescales and desired outcomes
validating that the programmes and projects are well structured,
organised and funded; and that they have the required competencies
and capabilities in place
making sure that effective performance management, measurement
and monitoring is place and in particular that:
-
the projects have defined benefits and outputs

ownership of the delivery of benefits remains with the
programme manager
outputs of the project remain consistent with changing aims
and objectives
targets and achieved benefits are measured, reported and
communicated
costs are closely monitored and managed; forecast costs and
benefits are frequently reviewed; management data is fit for
purpose; and sufficient controls are in place to ensure
accuracy.
14
Further information on how to undertake a strategic review in the NHS is

provided in the Capital Investment Manual.
Consideration should be given to completing a SOP, which in support of the
organisations business strategy and plans clarifies the programmes, subprogrammes, and the portfolio of projects required to deliver successfully
the desired outcomes.
A SOP is not mandated but is one way of ensuring that there is a clear
understanding of an organisations implementation strategy. Completion of
a SOP will serve to:
revisit the strategic context of the investment

prepare the programme for Gateway 0 strategic fit
provide the strategic context section for the subsequent business
cases.
Checklist for step 1

There should now be a clear understanding of the strategic context and how
the proposed project fits in with the programme blueprint and business
strategy.
Output of step 1
The implementation strategy/ SOP has now been completed.
Output of phase 0 and gateway review process
The implementation strategy/ SOP has now been completed. A gateway 0
for the strategic fit stage should now be considered.
Outcomes from the SOP
An implementation strategy/ SOP encourages effective strategic planning
and ensures that the context within which investments take place is
considered.
15
Stage 1 Scoping
Phase 1: Preparing the Strategic Outline Case (SOC)
Overview
The purpose of the Strategic Outline Case (SOC) is firstly to establish the
case for change and the need for investment; and secondly, to provide a
suggested way forward for the scheme for the early approval of
management. Consequently, it provides the initial agreement to proceed
with the scheme.
It is important that the preferred way forward within the SOC is not
confused with the preferred option which emerges from the OBC. The
preferred way forward provides management with a recommended direction
of travel, following the initial assessment of the long list upon completion of
the SOC. The preferred option is the recommended VFM choice, following
the detailed appraisal of the short list upon completion of the OBC.
SOCs are good practice for the following key reasons:
they provide an early opportunity for the organisation and key

external stakeholders to consider a project and influence its direction
they provide a basis for better decision making through reaching
agreement from the outset about key issues for the options
they prevent too much effort being put into projects which should
not proceed.

Introduction
This part of the business case defines the rest of the case, as it describes
the organisation in which the proposed investment will take place and
identifies the objectives from the key strategic drivers.
The main actions within this step are set out below:
Stages
Phase 1
Development Process
Preparing the Strategic Outline Case
(SOC)
Step 2
Action 2
Action 3
Making the case for change

Agree strategic context
Determine investment objectives, existing
arrangements and business needs
Determine potential business scope and
key service requirements
Action 4
16
Deliverables
Strategic case
Action 5
Determine benefits, risks, constraints and

dependencies
Action 2: agree strategic context

This section of the SOC provides an overview of the organisation and, in
terms of the proposed investment, demonstrates business fit and synergy
with other parts of the organisations business strategies.
Organisational overview
This part of the SOC provides a brief profile of the organisation, together
with a statement of what it is seeking to achieve and the nature and level of
resources currently at its disposal. The key areas of interest will include:
the mission of the organisation

its strategic vision, goals, business aims and service objectives
its current activities and services, including key stakeholders and
customers
its organisational structure, staff complement, business turnover and
geographical position
its existing financial and funding arrangements.
Much of this information may be gleaned from annual reports. However, it is

important to provide a snapshot of the organisation, given the fast pace of
change within the public sector.
Existing business strategies
This part of the SOC explains how the proposed investment fits within,
supports and promotes the agreed strategy and work programme of which
the project is an integral part. In doing so, it explains how the proposed
scheme helps to achieve the business goals, strategic aims and plans of the
organisation.
All relevant strategies should be referenced including those at national,
regional and local levels. Importantly, these strategies will highlight the
high level policy aims (strategic aims) and business goals of the organisation
from which the objectives for the investment will flow.
Much of this information should be available from existing documentation
prepared at departmental and organisational levels and the outcome of
deliberations at Phase 0 determining the strategic context.
Action 3: determine investment objectives, existing arrangements and
business needs
17
A robust case for change requires a thorough understanding of what the

organisation is seeking to achieve (the investment objectives); what is
currently happening (existing arrangements) and the associated problems
(business needs). Analysing a project in this way helps to provide a
compelling case for investment, as opposed to it simply being a good thing
to do.
Investment objectives
This stage is probably the most important stage of all, and possibly the most
underrated. It is concerned with defining the investment objectives for the
project in terms of the desired outcomes and where we want to be, within
the context of phase 0/ step 1 (determining the strategic context/ strategic
fit).
The investment objectives for the project must clearly relate to the
underlying policies, strategies and business plans of the organisation. They
should also be made SMART specific, measurable, achievable, relevant,
and time-constrained to help facilitate the subsequent generation of
options and provide the foundation for post-implementation review and
evaluation.
Investment objectives should:
be customer focused and distinguishable from the means of provision

focus on what needs to be achieved rather than the potential
solution
It is also important that investment objectives are not so narrowly defined

that they exclude important options, or so broad that they cause
unnecessary work at the option appraisal stage.
The setting of robust investment objectives is an iterative process as
subsequent appraisal (step 3, action 7) may change them. In practice, they
will generally be predicated on the need to:
provide further economies in the provision of an existing service

improve business effectiveness and service quality in terms of the
required outcomes
improve efficiencies in the throughput of services
meet statutory requirements and obligations
meet policy changes
deliver new business and operational targets.
Procuring an asset or service, or putting in place a scheme is never an

investment objective in itself. It is what an organisation is seeking to
achieve in terms of measurable returns on the investment that is important.
Existing arrangements
18
Within the parameters of the scope determined by the projects investment

objectives, this stage sets out the status quo. In other words, it looks at the
existing arrangements and explains how services are currently organised,
provided and supplied. It also includes details about stakeholders,
customers and associated throughput and turnover. In doing so, it provides a
snapshot of where we are now and consequently the basis for the do
nothing option.
Business needs
Having fully understood the existing arrangements for the service, this stage
pinpoints the business gap. In other words, the difference between where
we want to be (as suggested by the investment objectives) and where we
are now (in terms of existing arrangements for the service). This highlights
the problems, difficulties and inadequacies associated with the status quo.
This analysis should take into account existing and future changes in the
demand for services. In most cases, it will be necessary to include:
confirmation of the continued need for business operations, including

supporting evidence
projections of the nature and level of demand for future services
deficiencies in current provision
a summary of user requirements, clearly distinguishing between the
current and future.
A useful technique for populating this section of the business case is to

complete the following template for each of the investment objectives:
Stage1
Investment objective
Existing arrangement
Business need
What we are seeking to achieve

The status quo
The problems associated with the status quo
Action 4: determine potential business scope and key service

requirements.
This stage highlights the potential scope of the project and the services
required to satisfy the identified business needs and gaps.
Potential business scope
This action ascertains the scope of the project from the standpoint of the
business, in terms of affected business areas, functionality and organisation.
This is an extremely important action as it effectively sets out the
boundaries, or limitations, of the project only options within this scope
19
will be assessed within the economic case. If the scope is left open or vague
at this stage, the result will lead to scope creep and additional cost at the
procurement phase.
Resultant service requirements
Within the chosen scope for the project, this stage highlights the required
services, which in turn will form the basis of the statement of needs (SON)
or statement of service requirements (SSR) for the project.
In practice, it is beneficial to assess the potential scope and the associated
service requirements in terms of a continuum of business needs, ranging
from core (minimum requirement) to core plus desirable (intermediate
requirement) to core plus desirable plus optional (maximum requirement).
At this stage, core denotes the things that we must have; desirable the
things that we are prepared to consider on a cost/benefit basis; and
optional the things we that we might accept providing they are
exceptionally low cost. The table below can be used to record business
needs at each level:
Minimum
Intermediate
Maximum
Potential business
scope
Key service
requirements
Action 5: determine benefits, risks, constraints and dependencies

On the basis that the required services are put in place, this stage captures
the key benefits and risks associated with the proposed investment. It also
highlights the constraints and dependencies associated with the scheme.
Alongside the key investment objectives for the project, these aspects
provide a basis for selecting and evaluating options in the next stages.
Main benefits criteria
The benefits criteria should be developed by the parties most directly
affected by the proposal usually the main stakeholders and customers
(users) of the proposed services.
The benefits criteria fall into four main categories:
cash releasing benefits (CRB)
20
financial but non-cash releasing benefits (non CRB)

quantifiable (or quantitative) (QB)
non quantifiable (or qualitative) benefits.
The framework below gives an indication of the likely nature of benefits

criteria for different types (or class) of investment objective:
Class
Relative
value
High
Relative
timescale
Long-term
Benefits criteria
Operational
(management
related)
Medium
Medium-term
Qualitative and
quantitative
Direct
Cash-releasing
Non-cash releasing
Job
(task related)
Low
Short-term
Quantitative
Direct
Cash-releasing
Non-cash releasing
Strategic
(business
related)
Qualitative
Indirect/direct
Non-cash releasing
The benefits both direct and indirect to the organisation should be

captured for each investment objective against the relevant criteria. This
helps to:
indicate the relative value, or weight, of each investment objective.

This is essential later for the ranking, weighting and scoring of the
non-financial benefits and dis-benefits
pin point the main beneficiaries of the scheme both those within
the organisation (direct) and those elsewhere in the public service
(indirect). This recognises that occasionally those investing the most
financially might not always be the main beneficiaries of the scheme
ascertain whether the benefits are economic (non-cash releasing) or
financial (cash releasing); measurable, but not in cash terms; or
simply qualitative.
All categories will subsequently need evaluating.

Main risks
The main risks associated with the project and the proposed counter
measures should be identified at this stage. The emphasis should be on the
20% of risks which will account for 80% risk value. These risks will fall into
the following key categories:
21
Risk categories
Description
Business risks
These are the strategic risks which remain (100%)

with the public sector organisation regardless of the
sourcing method for the proposed investment. They
include political risks.
Service risks
These are the risks associated with the design,

build, financing and operational (DBFO) phases of
the proposed investment. They can be shared with
business partners and service providers.
External
environmental risks
These risks affect all organisations regardless of

whether they are public or private sector. They
include secondary legislation and general inflation.
Note: optimism bias also needs to be considered at this stage see step 4,
action 12 and departmental guidance for more details.
Constraints
The parameters within which the investment must be delivered should be
considered. This may entail acting in accordance with a Government policy,
directive or initiative, and on occasion within an affordability envelope (if
it has been made explicit) for the scheme.
The constraints are imposed on the project and must be managed from the
outset. However, in the case of affordability, it should generally be
assumed that further funds will always be made available where the
preferred option offers significantly improved value for money (VFM). This is
the policy of HM Treasury.
Dependencies
Any actions or developments required of others should be considered if the
ultimate success of the project is dependent upon them. This could entail
the successful delivery of the outputs associated with another project in the
overall programme of which the investment is an integral part.
A useful technique for populating this section of the business case is to build
upon the earlier recommended template for each investment objective
(step 2, action 3) as follows:
Stage1
Investment objective
Existing arrangement
Business need
Stage 2
Potential scope
What we are seeking to achieve

The status quo
The problems associated with the status quo
What we need to put in place to overcome these
22
Potential benefits
Potential risks
Potential constraints
Potential
dependencies
problems
The benefits we would accrue as a result
The potential risks which might arise
The limitations we face
The things that must be in place and/or managed
elsewhere

There should now be:
clear SMART investment objectives for the project

a clear understanding of the existing arrangements
a clear exposition of the business needs
a clear understanding of the potential scope for the project and/or
procurement
a clear statement of the associated benefits, risks, constraints and
dependencies for the project.
Output for step 2

The first draft of the Strategic Outline Case has now been completed.
Step 3: exploring the way forward
Introduction
This is the technical core of the business case and is a fundamental
requirement as it fulfils HM Treasurys requirements on how to demonstrate
VFM.
Having determined the strategic context for the project (phase 0/ step1)
and established a robust case for change (phase 1/ step 2), this stage of the
planning process focuses on the main choices (or options) available for
delivering the required services, with a view to formulating a preferred way
forward for the subsequent approval of management.
Importantly, it should be noted that an early indication of the possible, or
preferred, way forward could avoid considerable unnecessary work being
undertaken at the OBC stage.
We are now in the territory of the economic case. The main actions within
this step are shown below:
Stages
Phase 1
scoping
Development Process
Preparing the Strategic Outline Case (SOC)
23
Deliverables
Strategic case
Step 2
Step 3

Exploring the preferred way forward
Action 6
Action 7
Action 8
Agree critical success factors (CSFs)

Determine long list options and SWOT analysis
Recommend a preferred way forward
Output
Review point
Strategic Outline Case (SOC)

Gateway 1: business justification
Economic
case part 1
Including
outline
commercial,
financial and
management
cases
Action 6: agree critical success factors for the investment

By definition, CSFs are the attributes essential to the successful delivery of
the scheme, against which the available options are assessed. Alongside the
assessment against CSFs is the assessment of how well the options meet the
schemes investment objectives and benefits criteria.
CSFs will invariably differ from project to project, both in content and
relative importance; but the key point is that they must be crucial (not
desirable) and set at a level which does not exclude important options.
As a starting point, projects could consider the following, which are
predicated upon the Five Case Model:
Key CSFs
Strategic fit and
business needs
Broad Description
How well the option:
meets agreed investment objectives, related
business needs and service requirements
provides holistic fit and synergy with other
strategies, programmes and projects.
Potential VFM

maximises the return on the required
investment (benefits optimisation) in terms of
economy, efficiency and effectiveness
minimises associated risks.
Potential
achievability

is likely to be delivered in view of the
organisations ability to assimilate, adapt and
respond to the required level of change
matches the level of available skills which are
24
required for successful delivery.

Supply-side capacity
and capability

matches the ability of the service providers to
deliver the required level of services and
business functionality
appeals to the supply-side.
Potential
affordability

meets the sourcing policy of the organisation
and likely availability of funding
matches other funding constraints.
Action 7: determine the long list options and undertake SWOT analysis
The purpose of this action is to identify as wide a range as possible of
options that meet the investment objectives, potential scope and benefits
criteria identified in step 2. It also involves looking at the associated
strengths, weaknesses, opportunities and threats.
The Treasurys Green Book suggests in the order of a dozen main options in
the first instance. This is known as the long list. Best practice suggests
that these options should be generated by working parties (brainstorming
exercises) comprised of senior managers (business input), stakeholders and
customers (user input) and specialists (technical input).
As a matter of principle, it is important to include an option which will act
as the baseline for VFM. This may either be the status quo, do nothing or
do minimum, depending on which is the most realistic option in the
circumstances.
Options may sometimes appear to be ruled out for legal, financial or
political reasons. In such cases, undue time, effort and expense should not
be expended on appraising these options. However, it is equally important
to ensure that the constraints in question have not been imposed
artificially.
Creating options: HM Treasury Green Book
For creating the long list of options, the Green Book suggests:
research existing reports and consult widely with practitioners and

experts to gather the set of data and information relevant to the
objectives and scope of the problem
analyse the data to understand significant dependencies, priorities,
incentives and other drivers
from the research, identify best practice solutions, including
international examples, if appropriate
25
consider the full range of issues likely to affect the objective

identify the full range of policy instruments or projects that may be
used to meet the objectives. This may span different sorts or scales
of intervention; regulatory (or deregulatory) solutions may be
compared with self-regulatory, spending or tax options
develop and consider radical options. These may not become part of
the formal appraisal but can be helpful to test the parameters of
feasible solutions. Well-run brainstorming sessions can help to
generate such a range of ideas.
Examples of strategic and operational options include the following:
varying time and scale

options to rent, build or purchase
changing the combination of capital and recurrent expenditure
refurbishing existing facilities or leasing and buying new ones
co-operating with other parts of Government and the public sector
changing locations or sites
provision of the service (for example, maintenance) or facility by the
private sector
co-locating or sharing facilities with other agencies
using IT to improve delivery, as part of wider organisational change
transferring service provision to another body, or improving
partnership arrangements
varying the balance between outsourcing and providing services (or
retaining expertise in-house)
engaging the voluntary sector
regulation, including private sector self regulation and voluntary
action
different standards of compliance procedures for different groups (for
example, large and small businesses)
varying quality targets
different degrees of compulsion, accreditation and monitoring and
inspection regimes, including voluntary codes, approved codes of
practice or Government regulation
action at regional, national or international level (for example,
European wide)
better implementation of existing measures or initiatives
information campaigns
deregulation and non-intervention
changes that will be permanent in the foreseeable future, or
initiatives with specified time horizons.
Initial consideration of the potential for private sector involvement should

also be considered see step 4, action10.
Use of the options framework: long list
26
The options framework provides a simple and straightforward approach to

the identification and assessment of a broad range of relevant options (the
long list) for investment. It has been tested thoroughly in a wide range of
public sector schemes and proven to be particularly useful in getting senior
management signed-up and committed to the preferred or indicative way
forward early on in the business planning process.
The following table sets out an approach for identifying options for the long
list using a number of categories of choice formulated around the who, the
what, the when, the where and the how.
Category of Choice
Brief Description
Scoping options
In relation to the proposed scheme,

the what in terms of coverage (for
example, levels of functionality;
geographic coverage;
population/user base; organisation
etc).
In relation to the preferred scoping
option, the what in terms of the
how (for example, potential
solutions and answers, use of
technologies etc).
In relation to the preferred service
solution, the what in terms of the
who for service delivery (for
example, in-house; outsource; PPP
etc).
In relation to the preferred method
of service delivery, the what in
terms of the when for the rollout
and delivery of the scheme (for
example, big bang, phased, modular
delivery etc).
In relation to the preferred method
of implementation, the what in
terms of the funding. For example,
the use of capital v revenue; private
v public finance (see action10, the
use of PPPs/PFI); national v local
funding etc.
Service solution options
Service delivery options
Implementation options
Funding options
To use the options framework, the following actions should be taken:
identify the options within the first category of choice (scope)

assess how well each option meets the evaluation criteria
(investment objectives and CSFs)
27
decide whether each option is out, in or a maybe. In other

words, whether it should be discounted immediately; or carried
forward, either as the preferred choice in the category or a
possibility for consideration
consider the options for the delivery of the preferred choice (scope)
in relation to the next category of choice (service solution)
repeat the process for all other categories of choice.
At each stage it is helpful to record the results in a table for example, for
scoping options it could look like this:
Summary assessment of scoping options
Reference to:
Option 1.1
Option 1.2
Option 1.3
Option 1.4
Description of
option:
Intermediat
e
Maximum
Do nothing
Minimum
Investment
objectives
x
Business need
Strategic fit
Benefits optimisation
Critical success
factors
Potential achievability
?
?
Supply-side capacity
and capability
Potential affordability
Summary
?
x
Discounted
Possible
Preferre
d
Discounted
Drafting the long list

It is essential to be even handed when considering options in the long list
and to record all the relevant facts and details. It is therefore
recommended that the following headings are used when appraising options:
Heading
Rationale
28
Description
Main advantages
Main disadvantages
Conclusions
Full details of the option under consideration

this may be with reference to a category of choice
under investigation within the options framework.
In relation to the investment objectives, benefits
criteria and critical success factors for the
scheme.
As for advantages above.
Overall assessment, indicating whether the option
is the preferred choice, or should be carried
forward for further assessment in the short list; or
discounted and discarded.
Action 8: recommend a preferred way forward

This stage recommends a potential way forward, for the approval of
management, based on the appraisal of the main options (long list) for the
successful delivery of the scheme. In practice, this will consist of a
direction of travel for the delivery of the scheme, supported by a limited
number of attractive options known as the short list for further
evaluation in the OBC.
Short-listed options
In accordance with the Treasury Green Book, the SOC must outline a
minimum of three short-listed options for further examination at the OBC
stage.
These must include:
the do nothing; status quo; or do minimum option, which provides

the benchmark for VFM throughout the appraisal process
the reference project (or outline Public Sector Comparator (PSC) as
it is referred to within the OBC)
another option possibly predicated on a more or less ambitious
version of the reference project; or a PPP/PFI arrangement, if this is
a viable option.
Indicative costs and delivery arrangements

Indicative prices for each of the above short-listed options should be
provided at SOC stage, along with an overview of the financial, commercial
and management arrangements for the successful delivery of the proposed
scheme.
Importantly, some allowance for optimism bias should be made in the
indicative prices see the section on optimism bias in step 4, action 12.
Use of the options framework: short list
29
The results of the assessment of the long list may be used to help generate
the short list options as follows:
Category of Choice
Scoping
Service solution
Service delivery
Implementation
Funding
Option 1
Discount
c/f more
c/f less
Preferred
Discount
Option 2
Preferred
Discount
c/f more
c/f less
Preferred
Option 3
c/f less
Preferred
Discount
c/f more
c/f less
Option 4
c/f more
c/f less
Preferred
Discount
c/f more
Note: this table is populated by taking the results from each stage of the
options framework for example, the scoping results shown here come from
the summary shown earlier in this section.
The following actions should be taken:
to construct our reference project (or outline PSC) from the

preferred choices in each category i.e. an amalgamation of option 1
for implementation, option 2 for scope and funding and so on
to construct a more ambitious reference project from either some or
all of the c/f more scope, faster implementation etc
recommendations
to construct a less ambitious reference project from either some or
all of the c/f less scope, slower implementation etc
recommendations.
The short list must also include the do nothing or status quo options.
It should be noted that the reference project is essentially our preferred
way forward given that it is predicated upon our best assessment at this
stage of the possible scope, service solution, method of service delivery,
implementation and funding, following SWOT analysis of the available
options in each category of choice. Moreover, it has been arrived at logically
and systematically.
A brief outline reference to the other cases
A brief outline reference to other elements of the Five Case Model is
required at this point in the SOC in other words include an outline of the:
Commercial case
- assessment of the likely attractiveness of the project to
potential service providers, taking into account the PPP (PFI),
as required.
Financial case
- a statement of the organisations financial situation
- resources available for the project, including assessment of the
resource holders ability to provide support
- capital and revenue constraints
30
statements of strategic (or in principle) support from the

stakeholders.
Management case
- who is involved in the project, both inside and outside of the
organisation, including users, commissioners and other key
stakeholders
- achievability of the project, taking into account the
organisations readiness and resources
- how the project is to be managed
- other key managerial considerations, including: change
management, training, evaluation and timetable
- nature of further work needed to develop management
proposals.

There should now be:
a clear understanding of the projects critical success factors (CSFs)

a long list of 10 to 12 options , which have been subjected to SWOT
analysis
an emerging preferred way forward
a shortlist of 3 to 4 options with indicative costs for full evaluation in
the OBC
an outline consideration of the financial, commercial and
management cases for the project.
Output of step 3
The first draft of the economic case (as far as the long list and proposed
short list) has now been completed.
Output of phase 1 and Gateway Review Process
The SOC has now been completed. A Gateway 1 or Health Check 1 for the
business justification stage should now be considered for the project, prior
to the formal submission of the SOC to the approving authority for
agreement (if required).
Outcomes from the SOC
SOCs are good practice. They lay the basis for better decision making
through reaching agreement from the outset on the case for investment and
the key issues in the choices. SOCs also prevent too much effort being
expended on projects that should not proceed.
Management recommendations will focus on either:
31
abandoning the project, because it is considered unaffordable, too

ambitious, or too high risk in relation to the expected return
modifying the project
undertaking a pilot exercise to test out the assumptions and to inform
an eventual decision
going ahead with the project more or less as originally conceived with
a set of recommendations on how to proceed, including agreement or
adjustment to the proposed short list.
32
Stage 2 Planning
Phase 2: Preparing the Outline Business Case (OBC)
Overview
The purpose of the Outline Business Case (OBC) is to:
identify the investment option which optimises value for money

(VFM)
prepare the scheme for procurement
put in place the necessary funding and management arrangements
for the successful delivery of the scheme.
The preparation of the OBC is a mandatory part of the business case

development process.
Introduction
This is the investment (or option) appraisal phase of the project, where
the potential VFM of the scheme is determined in relation to the various
options for delivery, in accordance with the tools and techniques devised by
HM Treasury for use by public sector organisations.
Whilst bringing together a variety of information on costs, benefits and risks
means option appraisal aids decision making, it should not be seen as
unequivocally providing the right answer. The goal is optimal in other
words, the option we are looking for is the one which best balances the
costs in relation to the benefits and risks.
The main actions within step 4 are shown below:
Stages
Development Process
Phase 2
planning
Step 4
Preparing the Outline Business Case (OBC)
Action 9
Revisit SOC and determine short list, including

the Reference Project (outline PSC)
Prepare the economic appraisals for short-listed
options
Undertake benefits appraisal
Undertake risk assessment/appraisal
Select preferred option and undertake sensitivity
analysis
Action 10
Action 11
Action 12
Action 13
Determining potential VFM
33
Deliverables
Economic
case part 2
Action 9 revisit the SOC and determine the short list

This action is concerned with:
revisiting the case for change (contained within the strategic case of
the SOC)
reviewing the efficacy of the preferred way forward and options
recommended (contained in the economic case within the SOC)
bearing in mind that the key place for options appraisal is the OBC
and that only a preferred way forward (to be tested) has been
agreed.
Revisiting the strategic case

The case for change should be reviewed, because:
managements approval of the SOC may have been conditional on

some changes and adjustments to the case
the early opportunity for the organisation and key external
stakeholders to consider the project may have influenced its
subsequent direction
some time may have elapsed between SOC approval and the
commencement of the OBC
other elements of the scheme may have changed.
All changes made to the underlying assumptions in the SOC should be noted
within the opening section to the strategic case in the OBC.
Reviewing the economic case
The early work on the long list and the preferred way forward will need
reviewing and refining.
The recommended short list contained in the SOC should be tested against
the following long list to short list criteria:
do any of the options fail to deliver the investment objectives and

CSFs for the project?
do any of the options appear unlikely to deliver sufficient benefits,
bearing in mind that the intention is to invest to save and to deliver
a positive net present value (NPV)?
are any options clearly impractical or unfeasible for example, the
technology or land is not available?
34
is any option clearly inferior to another, because it has greater costs

and lower benefits?
do any of the options violate any of the constraints for example, are
any clearly unaffordable?
are any of the options sufficiently similar to allow a single
representative option to be selected for detailed analysis?
are any of the options clearly too risky?
All changes made to the underlying assumptions in the SOC should be noted
within the opening section to the economic case in the OBC.
Action 10 prepare the economic appraisals for short-listed options
This action is concerned with:
estimating the costs for the economic appraisals

estimating the benefits for the economic appraisals
presenting the economic appraisals.
Estimating the costs and benefits for the economic appraisals

This section contains essential guidance on:
HM Treasury Green Book principles

the key differences between economic and financial appraisals
relevant costs to include in the economic appraisals
estimating benefits for the economic appraisals
adjustments required to estimates of costs and benefits.
HM Treasury Green Book principles

The Treasury Green Book sets out rules that should be followed for the
treatment of costs and benefits:
the relevant costs and benefits to government, the public sector and
society of all the (short-listed) options should be valued and the net
benefit and costs calculated. Relevant in this instance means all
those costs and benefits that can be affected by the decision at hand
the costs and benefits should normally be extended to cover the
useful lifetime of the assets; or the contractual period for the
purchase of the service outputs and outcomes
the costs and benefits should be based on market prices and reflect
the best alternative uses (the opportunity cost) that the goods,
assets and services could be put to
35
the wider social and environmental costs for which there is no

market price should also be taken into account
the sources and assumptions underlying each cost and benefit line in
the economic appraisals must be explained in full within an
accompanying append ix
all cost estimates must be stated in the same base year at a common
price level. The base year should be the same for all options. The
base year is defined as year 0.
Economic and financial appraisals

Many practitioners confuse the appraisals for the economic case with those
for the financial case at this stage. Economic appraisals have a macro
perspective and focus on VFM analysis; whereas financial appraisals have a
micro perspective and focus on affordability. The key differences can be
summarised as follows:
Economic Appraisals
Financial Appraisals
Focus:
VFM net present value/cost
(NPV/NPC)
Focus:
affordability cash flow
Coverage:
wide coverage Government
and Society (UK Ltd)
Coverage:
relevant organisation(s)
Relevant standards:
HM Treasury Green Book rules
discount rate (3.5%) applied
Relevant standards:
organisational accounting
rules and standing orders
Analysis:
constant (real) prices
includes opportunity cost
includes indirect and
attributable costs costs of
others
includes all quantifiable costs,
benefits and risks
includes environmental costs
excludes all Exchequer
transfer payments for
example, VAT
excludes general inflation
excludes sunk costs
excludes depreciation and
capital charges.
Analysis:
current (nominal) prices
benefits cash releasing only
includes transfer payments
(for example, VAT)
includes inflation
includes depreciation and
capital charges.
36
Relevant costs for the economic appraisals

The following provides an overview of the costs which should be included in
the economic appraisals:
Capital costs: these include the opportunity cost of existing assets

such as land and can broadly be broken down into: land and property;
construction and refurbishment costs; professional fees; equipment
(furniture, fittings, lighting and wiring); and the cost of technology.
Assets may require replacement, refurbishment or upgrading over the
lifetime of the appraisal period. These life-cycle costs should also
be included.
Revenue costs: these are the running costs and are at least as
important as capital costs. They must be included but it should not
be assumed that they will remain unchanged for the baseline option
over time. The assessment of revenue costs must:
- assume that the running costs of each option will normally be
different; distinguish between them and explain the differences
between options
- include all the running costs
- state the assumptions made (for example, about service
performance, efficiency savings and real cost trends).
Fixed, variable, semi-variable and step costs. These should be

distinguished between within the economic appraisals and their
relationships explained in full.
- fixed costs remain constant over a wide range of activities for a
specified period of time for example, the building
- variable costs vary according to the volume of activity for
example, training costs
- semi-variable costs include both fixed and variable components for
example, a combination of fixed maintenance costs and variable callout charges
- step costs for a pre-determined level of activity that eventually rise
by a given amount for example, the need for a new call centre after
a certain volume of calls.
Opportunity costs. These must be explored in full. In relation to land

and manpower, they should be assessed against the most valuable
alternative use rather than current use. Full time equivalents (FTE)
costs should be used to estimate the costs of employees time to the
employer and must include all costs in addition to basic pay for
example, pensions, national insurance and allowances etc.
Sunk costs. These are amounts that have already been spent and
cannot be recovered. they should be noted in the case and excluded
37
from the economic appraisals. However, it may be necessary to

include the opportunity cost of continuing to pay for associated goods
and services on some occasions.
Full economic costs. The full costs (direct, indirect and attributable)
of each option, rather than its net cost in relation to the baseline
proposal must be shown. This means bottom up costing, which
provides a better understanding of the cost differences between
options and is more transparent.
Attributable costs. These include the opportunity cost of staff time

in relation to the implementation of the investment. These costs are
likely to be significant in relation to business change and business reengineering programmes.
Organisational development. These costs can form a significant

proportion of the overall costs. They should not be underestimated,
because if insufficient resources are allocated to developing staff and
changing working practices, the full benefits of the project will not
be achieved.
Avoided costs. These should either be included as a cost in the do

nothing option or as a cash benefit in the other option(s).
Contingent liabilities. Commitments to future expenditure if certain

events occur should be included in the economic appraisals. For
example, the cancellation costs for which a public sector body may
be liable if it prematurely cancels a contract. Note that although
redundancy costs are transfer payments, they can occasionally fall
into this category. In such cases, the advice of an economist should
be sought on the wider social and economic consequences of these
payments.
Estimating benefits for the economic appraisals

The purpose of valuing benefits is to ascertain whether an options benefits
are worth its costs, and to allow alternative options to be compared
systematically in terms of their net benefits or costs.
Benefits identification
The golden rule is that all benefits must be quantified (in s) prudently,
wherever possible; and that the economic appraisals should take these into
account from the perspective of society and the public and private sectors,
as well as the organisation.
38
The benefits for investments typically fall into four main categories:
cash releasing benefits (CRB). These benefits reduce the costs of

organisations in such a way that the resources can be re-allocated
elsewhere. This typically means that an entire resource is no longer
needed for the task for which it was previously used. This can be
staff or materials
financial but non-cash-releasing benefits (non-CRB). This usually
involves reducing the time that a particular resource takes to do a
particular task; but not sufficiently to re-allocate that resource to a
totally different area of work
quantifiable benefits (QB). These benefits can be quantified, but not
easily in financial terms for example, reduced travelling time for
customers. The extent to which QBs are measured will depend on
their significance. However, as a general rule every effort should be
made to quantify benefits financially wherever possible
non-quantifiable (non-QB). These are the qualitative benefits, which
are of value to the public sector but cannot be quantified. For
example, an increase in staff morale as a consequence of less form
filling.
All the financial benefits cash releasing and non-cash releasing must be
accounted for in the discounted cash flows to derive the net present value
(NPV) in the economic appraisals. However, only the cash releasing savings
relevant to the organisation(s) should be accounted for in the financial
appraisals see step 6 (ascertaining affordability and funding).
Weighting and scoring techniques should be used to evaluate the nonfinancial benefits both quantifiable and qualitative.
Real or estimated market prices
Real or estimated prices provide the first point of reference for the
valuation of benefits and there are few cases where valuing at market
prices is not suitable. However, if the market is dominated by monopoly
suppliers or is significantly distorted by taxes or subsidies, a number of
approaches have been developed to value non-marketed goods. These
include:
revealed preference approach (i.e. inferring a price from consumer

behaviour)
willingness to pay (i.e. inputting a price by means of carefully
constructed questionnaires and interviews to indicate how much
people are prepared to pay to consume a particular output for
example, improved access to services or savings in time, or to avoid
undesirable outcomes). The values obtained from this approach will
39
vary between individuals, depending on their income, socio-economic

status and personal circumstances.
Adjustments required to the values of costs and benefits
While developing the base case (i.e. the best estimate of how much a
proposal will cost in economic terms), adjustments may be required to take
account of distributional impacts and relative price changes. All
adjustments should be shown separately and clearly stated in supporting
tables of data.
Distributional analysis
This takes into account the diminishing marginal utility of additional
consumption, which basically means that a proposal may have differing
impacts according to age, gender, ethnic group, health, skill or location.
These effects should be explicitly stated and quantified (in s), given that
an extra will provide more benefit to someone who is deprived than to
someone who is well-off.
Applying a distributional adjustment requires detailed information about the
affected population. A detailed explanation is needed when this adjustment
is required but not made.
Relative price changes
The costs and benefits presented in the economic appraisals should be
expressed in real terms or constant prices, as opposed to current or
nominal prices. The effect of future inflation on the general price level
should therefore be removed by deflating prices by the relevant deflator
for example, the Bank of Englands annual inflation target.
Where particular prices are expected to increase at significantly higher or
lower rates than general inflation, the relative price change should be
calculated and factored into the economic appraisals.
Presenting the economic appraisals
Following the identification and measurement of the costs and benefits for
each option, it should now be possible to estimate the net present value
(NPV) for each option, using the appropriate discount rate the preferred
method of investment appraisal within the public sector.
This section is concerned with compiling the economic appraisals for the
short listed options including the do nothing or do minimum in their
most basic format. Guidance is given on the following:
40
methods for investment appraisal

discounting in the public sector
calculating the NPV
the equivalent annual cost (EAC)
required rates of return and pricing rules
the treatment of PPP (PFI) schemes, if applicable
tax differentials.
Methods for investment appraisal

There are two main schools of thought for evaluating the performance of an
investment project, namely the accounting method and economics
method.
The accounting method focuses on liquidity/pay back period and
profitability (see the financial case step 6/ action 19); whereas the
economics method focuses on wealth maximisation, cash flows, resource
allocation and considerations of risk and uncertainty.
The two main economics methods are NPV and the internal rate of return
(see required rates of return and pricing rules below).
The recommended approach within the public sector is to calculate the
NPV, which is the sum of discounted costs and benefits.
Discounting in the public sector
Discounting is a technique used to compare the costs and benefits that
occur in different time periods. It must not be confused with inflation and is
based on the premise that a pound today is worth more than a pound
tomorrow. Consequently, people prefer to receive goods and services
today, rather than tomorrow. This is known as the time preference and for
society as a whole, as the social time preference.
The discount rate used in public sector projects or the test discount rate
as it is often referred to is stipulated by HM Treasury. It is currently set at
3.5% in real terms, which reflects the opportunity cost of public sector
capital and the social rate of time preference.
The following table shows how the present value (PV) of 1,000 declines in
future years with the 3.5% discount rate.
Present values and the 3.5% discount
Time
41
(yrs)
PV()
1,000
966
934
902
871
842
814
786
759
734
Long term discount rates

Sometimes other rates are applicable for example, where the appraisal of
a proposal depends materially on the discounting of effects in the very longterm. For costs and benefits accruing over more than 30 years, the Treasury
Green Book suggests:
Discount rates for long term proposals
Period of Years
0-30
31-75
76-125
Discount rate
3.5%
3.0%
2.5%
126-200 201-300
2.0%
1.5%
301+
1.0%
When undertaking sensitivity analysis (see action 13), the impact of

changing the discount rate should be analysed in the same way as for other
parameters in the proposal.
Calculating the NPV
The following case study shows how the NPV is calculated:
Case Study
Alternative projects, A and B, are both expected to improve the quality of a
public sector organisations work and reduce staff costs. The base case of
each option is being estimated.
Option A requires 10 million in initial capital expenditure to realise
benefits of 2.5 million per annum for the following four years - 2 million
in reduced staff costs and 0.5 million in quality improvements.
Option B requires 5 million in initial capital expenditure to realise benefits
of 1.5 million per annum for the following four years - 1 million in
reduced staff costs and 0.5 million in quality improvements.
Year - million
Discount factor
0
1
NPV
0.9962 0.9335 0.9019 0.8714
Option A
Costs
Benefits
NPV
-10
2.50
2.50
2.50
2.50
-10
2.42
2.33
2.25
2.18
Option B
42
- 0.82
Option B
Costs
-5
Benefits
1.50
1.50
1.50
1.50
NPV
-5
1.45
1.40
1.35
1.31
0.51
Project B yields a positive NPV of 0.51 million compared with a negative

NPV of 0.82 million for project A and zero for the implicit do minimum or
do nothing alternative. Therefore Project B is preferable.
The Equivalent Annual Cost (EAC)

In option appraisal, the appropriate time period over which the discounting
should be undertaken is the assumed life of the asset or service period.
However, if the options under consideration have different life spans, this
needs to be reflected in the calculations to enable consistent and valid
comparisons to be undertaken.
By annualising the discounted costs of the assets or service contract periods
over their respective life spans and comparing these equivalent annual
payments, the effects of the different life spans can be accommodated.
To compute the EAC, the following steps are required:
set out the phased pattern of capital and revenue payments for the
option
discount the total and sum to calculate the NPV of the option
apply the appropriate EAC to the NPV for detailed guidance on
calculating EACs refer to HM Treasurys Green Book which includes a
worked example.
Required rates of return and pricing rules

Some public sector organisations operate in a pseudo market place or sell
goods and services commercially, including to other public sector bodies.
These activities may be controlled by requiring prices to be set to provide a
required rate of return on the capital employed by the activity as a whole.
Generally, public sector policy sets charges for goods and services sold
commercially at market prices, and recovers full costs for monopoly
services, including the cost of capital.
The use of public private partnerships (PPPs)/ private finance initiative
(PFI)
43
The above guidance does not materially alter how a PPP/PFI option for the
delivery of the required services should be treated in the short list.
Consideration of the use of a PPP and/or PFI arrangement may have been
discounted (for policy reasons) or accepted as an option (given the limited
availability of capital and the efficacy of such an arrangement) at the SOC
stage.
In the absence of PPP/PFI costs at this stage, the outline Public Sector
Comparator (PSC) provides an estimate of how much it will cost the public
sector, as a traditional supplier, to provide the facility and associated
services defined in the output based specification for the project.
Occasionally, it may be possible to estimate the cost of an outline PSC or
reference project assuming a PFI structure. But generally this will only
happen where it has been decided, first, that a privately financed solution
is the only way forward (as in the case of HM Treasurys significant PFI
(PPP) projects); and costs are available for similar projects. In most cases,
the outline PSC will be predicated on in-house or outsourced costs for the
provision of services, regardless of whether a privately financed solution is
still being considered.
Assessing the potential of PPP (PFI)
The Confederation of British Industry (CBI) has developed the following
criteria for assessing the eligibility of public sector schemes against private
funding (CBI Report: Private Skills in Public Service). While none of these
conditions in itself guarantees success, they may allow for a more informed
decision at the long list stage (see step 3, action 7). The table is used to
show the potential for a project to have favourable PPP/PFI
characteristics.
Investment Criteria
High
1. Output/service-delivery driven
2. Substantial operating content within the
project
3. Significant scope for additional/alternative
uses of the asset
4. Scope for innovation in design
5. Surplus assets intrinsic to transaction
6. Long contract term available
7. Committed public sector management
8. Political sensitivities are manageable
44
Medium
Low
9. Risks primarily commercial in nature

10. Substantial deal
11. Complete or stand alone operations to
allow maximum synergies
The use of HM Treasurys model for the early assessment of a schemes
potential to be delivered under the PPP (PFI) should also be considered at
this point.
HM Treasurys PFI VFM model
In addition, a standard mandatory spreadsheet for the VFM assessment of
PPP/PFI schemes has been developed by HM Treasury as a tool to assist
procuring authorities undertake a quantitative analysis to support the VFM
decision as to whether to use PFI or conventional procurement.
The two sourcing methods are:
the PSC option procurement through conventional approaches that

use public capital. For example, letting a design and build contract
for the construction of an asset, and then letting annual operating
and maintenance contracts for the ongoing maintenance of the asset
the PFI option procurement under PFI which is a specific funding
methodology through which the public sector lets a design, build,
finance and operate contract to the private sector for the
construction and whole life maintenance of an asset and/or
associated service.
This spreadsheet should be attached to all business cases which consider a

PPP/PFI proposal. It has been designed to meet the following objectives:
to ensure that the simplicity of approach reflects the early point at

which this analysis takes place
to focus procuring authorities minds on the underlying assumptions
and the interplay with qualitative judgement
to reduce costs and ensure that ownership of the decision lies with
the procuring authority and not their advisers
to introduce consistency across the public sector and improve the
underlying evidence base.
However, it does not provide:
an affordability envelope
the basis for bid evaluation or reference model
a pass/fail point estimate for deciding between PFI and conventional
procurement.
45
For further guidance please see HM Treasurys Quantitative Assessment User

Guide, August 2004: www.hm-treasury.gov.uk
Tax differentials
The adjustment of market prices for taxes in economic appraisals is
appropriate where it may make a material difference to the decision. In
practice, it should be relatively rare that adjustments are required, because
similar tax regimes usually apply to different options. However, the tax
differential should be taken into account when comparing a publicly
financed option to a privately financed option, in order to avoid distorting
the outcome.
For further guidance on any of the above, please refer to the Treasury
Green Book.
Action 11 - undertake benefits appraisal
Benefits which can be quantified financially (in s) should be included in the
economic appraisals and subject to cost benefit analysis (CBA). However, in
many investment proposals some benefits are not amenable to monetary
values for example, the future proofing of the organisation;
improvements in staff morale and customer relations; flexibility and
improved accuracy.
A method in common use within option appraisal is to weight and score the
non-financial benefits for each option. This is preferable to simply ranking
the benefits, as placing them in their order of priority does not in itself
provide any objective assessment of how the incidence of these benefits
varies from option to option.
Weighting and scoring of benefits
Weighting and scoring provides a technique for comparing and ranking
options in terms of their associated non-financial benefits. It should be
undertaken as follows:
exclude all financial benefits, whether cash-releasing or non-cash

releasing
group the quantifiable (non-financial) and qualitative benefits
according to their relevant investment objective, and/or other
benefit criterion for the scheme as a whole
select an expert and representative team to weight and score the
benefits for each short-listed option
give a weight (0 to 100) to each of the investment objectives and/or
benefit criteria
46
give a score (1 to 10) to each option for how well it delivers the
benefits associated with each investment objective or benefit
criterion
multiply the weights and scores to provide a total weighted score for
each option
rank the options in terms of benefit delivery and identify the
preferred option on the basis of the highest score.
Baseline benefits levels

It is important to try and distinguish between the benefits derived from
each option and the benefits which would be derived anyway. The total
benefits of the do nothing option is the baseline for comparison of the
benefits of the other options. The benefits of doing nothing (even if there
are none) must, therefore, be assessed in the same way as the other
options.
Recording the results
The process and the reasoning behind the scores and weightings must be
documented clearly to demonstrate that a robust analysis has been carried
out. Again, it is important to recognise that the assigned weights and the
scores given to options are value judgments. In order to assign weights and
scores, negotiation and compromise needs to take place. It is the number of
people involved in the process and their expertise that lends credibility to
these value judgments. It is, therefore, worth spending some time choosing
a representative benefits team which should include stakeholders,
customers (users), and business and technical representatives. The people
involved should be named as part of the recording process.
Case study
The benefit criteria (attributes), weights and scores for the OBC in support
of an NHS accommodation scheme are shown below. It uses a score out of
10 according to how well each of the options match-up to the benefit
criteria. These scores are then multiplied by the pre-agreed weightings to
give a total score for each option.
Do Nothing
Benefit
Criteria
Option B
Option C
Weight
Score
Quality of
clinical care
30
210
Patient
accessibility
15
15
60
Weight
x score
47
Score
Weigh
tx
score
Score
Weight x
score
Flexibility of
accommodation
20
80
120
Quality of hotel
services
20
100
80
Disruption to
services
15
45
Total
100
195
515
Action 12 undertake risk assessment and appraisal

The Treasury Green Book and departmental manuals have always required
public sector organisations to undertake a risk assessment of the short listed
options. However, until fairly recently, business cases rarely quantified the
risks associated with each option.
Consequently, it is recommended that the service risks associated with a
significant scheme should be measured and quantified (in s) as early as
possible and that as a minimum requirement:
allowance for optimism bias should be applied at the SOC and OBC
stages
service risks should be quantified (in s) at the OBC and FBC stages
the weighting and scoring of risks should be confined to the initial
assessment of options at the SOC stage; and thereafter to relatively
low investments (in terms of s) at OBC and FBC stages.
Optimism bias
Within both the public and private sectors, there is a demonstrated and
systematic tendency for project appraisers to be overly optimistic. This is a
worldwide phenomenon, whereby appraisers tend to overstate benefits, and
understate timings and costs, both capital and operational.
To redress this tendency, appraisers are now required to make explicit
adjustments for this bias. These will take the form of increasing estimates
of the costs and decreasing and delaying the receipt of estimated benefits.
Sensitivity analysis should be used to test assumptions about operating costs
and expected benefits.
Adjusting for optimism provides a better estimate earlier on of key project
parameters. Enforcing these adjustments for optimism bias is designed to
complement, rather than replace, existing good practice in terms of
calculating project specific risk. It is also designed to encourage more
accurate costing. Accordingly adjustments for optimism bias may be
reduced as more reliable estimates of relevant costs are built up and
project specific risk work is undertaken.
48
Adjustments should be empirically based for example, using data from past
projects or similar projects elsewhere, and adjusted for the unique
characteristics of the project. Guidance for generic projects is available
(see below) and should be used in the absence of more specific evidence.
Departmental guidance is also available and should be referred to at this
stage.
Guidance for generic projects
The definitions of project types are as follows:
standard building projects these involve the construction of

buildings which do not require special design considerations (i.e.
most accommodation projects for example, offices, living
accommodation, general hospitals, prisons, and airport terminal
buildings)
non-standard building projects these involve the construction of
buildings requiring special design considerations due to space
constraints, complicated site characteristics, specialist innovative
buildings or unusual output specifications (i.e. specialist/innovative
buildings for example, specialist hospitals, innovative prisons, high
technology facilities and other unique buildings or refurbishment
projects)
standard civil engineering projects these involve the construction
of facilities, in addition to buildings not requiring special design
considerations for example, most new roads and some utility
projects
non-standard civil engineering projects these involve the
construction of facilities, in addition to buildings requiring special
design considerations due to space constraints or unusual output
specifications for example, innovative rail, road, utility projects, or
upgrade and extension projects
equipment and development projects these are concerned with
the provision of equipment and/or development of software and
systems (i.e. manufactured equipment, information and
communication technology development projects or leading edge
projects)
outsourcing projects these are concerned with the provision of
hard and soft facilities management services for example,
information and communication technology services, facilities
management and maintenance projects.
Applying adjustments for optimism bias

The table below provides adjustment percentages for these generic project
categories that should be used in the absence of more robust evidence. It
49
has been prepared from the results of a study by Mott MacDonald into the
size and causes of cost and time over-runs in past projects.
Optimism Bias (%)
Project Type
Works Duration
Capital Expenditure
Upper
Lower
Upper
Lower
Standard buildings
24
Non-standard buildings
39
51
Standard civil engineering
20
44
Non-standard civil engineering
25
66
Equipment/development
54
10
200
10
Outsourcing
n/a
n/a
41*
0*
* the optimism bias for outsourcing projects is measured for operating

expenditure.
Recommended steps
Project managers should apply the steps set out below to derive the
appropriate adjustment factor to use for their projects:
Step 1 decide which project type to use

Careful consideration needs to be given to the characteristics of a
project when determining its project type. By way of guidance, a
project is considered non-standard if it satisfies any of the following
conditions:
- it is innovative
- it has mostly unique characteristics
- construction involves a high degree of complexity and/or difficulty.
A project which includes several project types (for example, an
element of standard building, non-standard building, standard civil
engineering, outsourcing and equipment/development) should be
considered as a programme with five projects for assessment
purposes
Step 2 always start with the upper limit

Use the appropriate upper bound value for optimism bias (see above
table), as the starting value for calculating the level of optimism bias
Step 3 consider whether the optimism bias factor can be reduced

Reduce the upper bound level for optimism bias according to the
extent to which the contributory factors have been managed.
50
The extent to which these contributory factors are mitigated can be

reflected in a mitigation factor. The mitigation factor has a value
between 0.0 and 1.0. Where 0.0 means that contributory factors are
not mitigated at all, 1.0 means all contributory factors in a particular
area are fully mitigated and values between 0.0 and 1.0 represent
partial mitigation.
Optimism bias should be reduced in proportion to the amount that
each factor has been mitigated. Ideally, the optimism bias for a
project should be reduced to its lower bound before contract award.
This assumes that the cost of mitigation is less than the cost of
managing any residual risks
Step 4 apply the optimism bias factor

The present value of the capital costs should be multiplied by the
optimism bias factor. The result should then be added to the total
net present cost (or NPC) to provide the base case. The base case, as
defined in the Green Book, is the best estimate of how much a
proposal will cost in economic terms, allowing for risk and optimism
Step 5 review the optimism bias adjustment

Clear and tangible evidence of the mitigation of contributory factors
must be observed, and should be verified independently, before
reductions in optimism bias are made. Procedures for this include the
Gateway Review process.
Presenting the results

Following these steps will provide an optimism bias adjustment that can be
used to provide a better estimate of the base case. Sensitivity testing should
be used to consider uncertainties around the adjustment for optimism bias.
Switching values (see below action 13) should be shown where
appropriate. If the adjustment for optimism is shown as a separate piece of
analysis, sensitivity analysis should be used to show the range of potential
outcomes, not just the single optimism bias adjustment.
Reducing optimism bias
Project appraisers should review all the contributory factors that lead to a
cost and time over-run, as identified by the research. The main strategies
for reducing the bias are:
full identification of stakeholder requirements (including

consultation)
accurate costing
project and risk management.
51
The lower bound values represent the optimism bias level to aim for in
projects with effective risk management by the time of contract award.
Case study
The capital costs of a non-standard civil engineering project are estimated
to be 50m NPC in a SOC. No detailed risk analysis work has taken place at
this stage, although significant costing work has been undertaken.
The project team reports to the project board and applies an optimism bias
adjustment of 66% showing that, for the scope of the work required, the
total cost may increase by 33m to 83m in total. This is based on
consultants evidence and experience from comparable civil engineering
projects at a similar stage in the appraisal process.
As this potential cost is unaffordable, the chief executive requests
reductions in the overall scope of the project, and more detailed work for
the OBC. As the project progresses, more costs and specific risks are
identified explicitly, despite the reduced cost. For the FBC the optimism
bias adjustment is reduced until there remains only a general contingency of
6% for unspecified risks.
Without applying optimism bias adjustments, a false expectation would have
been created that a larger project could be delivered at a lower cost.
Operating costs and benefits

Optimism bias should still be considered for operating costs and benefits. If
there is no evidence to support adjustments to operating costs or benefits,
appraisers should use sensitivity analysis to check switching values (see
below action 13). This should help to answer key questions such as:
by how much can we allow benefits to fall short of expectations, if

the proposal is to remain worthwhile? How likely is this?
by how much can operating costs increase, if the proposal is to
remain worthwhile? How likely is this to happen?
what will be the impact on benefits if operating costs are
constrained?
Risk identification and measurement

There is always likely to be some difference between what is expected and
what eventually happens, because of biases unwittingly inherent in the
appraisal, and the risks and uncertainties that materialise during the design,
build, and operational phases of the project. As a result, risk management
52
strategies should be adopted for the appraisal and implementation of large

policies, programmes or projects and the principles applied to smaller
proposals. This is because things can always go better than expected
(upside risk) as well as worse (downside risk).
It is important to develop a risk register from the very beginning of the
project (see management case). From then on the risk register should be
updated and reviewed regularly and used on a consistent basis as the source
for:
identifying the main business and service risks (in the strategic case
section)
quantifying and appraising the business and service risks (in the
economic case section)
apportioning and transferring service risks (in the commercial case
section)
mitigating and managing risks over the entire life cycle of the
project/ scheme.
Risk identification
There are a number of techniques which may be used to identify the risks
associated with projects. These techniques can be applied to any type of
project. Three commonly used methods are:
structured review meetings these involve the project team and

encourage participation and ownership of the risks by key personnel
risk audit interviews these are conducted by experienced managers
and/or advisers, with all those involved in the project with
experience of risk
brainstorming workshops these include all members of the project
team and encourage imaginative ideas.
General types of risk

Risks fall into three main categories: business, service and external.
Business related risks remain with the public sector and can never be
transferred. Service related risks occur in the design, build and operational
phases of a project and may be shared between the public and private
sectors. External environmental risks relate to society and impact on the
economy as a whole.
The generic types of risk that are likely to be encountered within these
categories are set out in broad terms below:
Generic Risks
Description
53
Business risk
The risk that the organisation cannot meet its

business imperatives.
Reputational risk
The risk that there will be an undermining of

customers/medias perception of the
organisations ability to fulfil its business
requirements for example, adverse publicity
concerning an operational problem.
Service risk
The risk that the service is not fit for purpose.
Design risk
The risk that design cannot deliver the services to

the required quality standards.
Planning risk
The risk that the implementation of a project fails

to adhere to the terms of the planning permission
or that detailed planning cannot be obtained; or,
if obtained, can only be implemented at costs
greater than in the original budget.
Build risk
The risk that the construction of physical assets is

not completed on time, to budget and to
specification.
Project intelligence risk The risk that the quality of initial intelligence (for
example, preliminary site investigation) will
impact on the likelihood of unforeseen problems
occurring.
Decant risk
The risk arising in accommodation projects

relating to the need to decant staff/clients from
one site to another.
Environmental risk
The risk that the nature of the project has a major

impact on its adjacent area and there is a strong
likelihood of objection from the general public.
Procurement risk
The risk that can arise from the contractual

arrangements between two parties for example,
the capabilities of the contractor/ when a dispute
occurs.
Operational risk
The risk that operating costs vary from budget and

that performance standards slip or that a service
cannot be provided.
Availability and
performance risk
The risk that the quantum of service provided is

less than that required under the contract.
Demand risk
The risk that the demand for a service does not

match the levels planned, projected or assumed.
As the demand for a service may be partially
controllable by the public body concerned, the
risk to the public sector may be less than
perceived by the private sector.
Volume risk
The risk that actual usage of the service varies

from the levels forecast.
54
Occupancy risk
The risk that a property will remain untenanted

a form of demand risk.
Maintenance risk
The risk that the costs of keeping the assets in

good condition vary from budget.
Technology risk
The risk that changes in technology result in

services being provided using sub-optimal
technical solutions.
Funding risk
The risk that the availability of funding leads to

delays and reductions in scope as a result of
reduced monies.
Residual value risk
The risk relating to the uncertainty of the values

of physical assets at the end of the contract
period.
External
environmental risks
The risks faced by society as a whole.
Economic risk
The risk that project outcomes are sensitive to

economic influences for example, where actual
inflation differs from assumed inflation rates.
Legislative risk
The risk that legislative change increases costs.

This can be divided into secondary legislative risk
(for example, changes to corporate taxes) and
primary legislative risk (for example, specific
changes which affect a particular project).
Policy risk
The risk of changes in policy direction leading to

unforeseen change. Again, this can either be
general to all or specific to a particular project.
Risk quantification
It is good practice to add a risk premium to provide the full expected
value of the base case and alternative options. As explained, in the early
stages of an appraisal, this risk premium may be encompassed by a general
uplift to a projects NPV to offset and adjust for undue optimism. But as the
appraisal proceeds, more specific risks will be identified, thus reducing the
more general optimism bias.
An expected value provides a single value for the expected impact of all
risks. It is calculated by multiplying the likelihood of the risk occurring
(probability) by the size of the outcome (impact) as quantified in financial
terms, and summing the results for all risks and outcomes. It is therefore
best used when both the likelihood and outcome can be estimated
reasonably well.
Single point probability analysis
55
At its most basic, a risk analysis could consist of an estimate of the cost of
each risk occurring, multiplied by a single probability of that risk occurring
in a particular year see the example below.
Case study: single point analysis

Annual cost of service
2 million
Estimated impact of risk of cost

over-run
200,000
Estimated probability of risk

occurring
10%
Estimated value of risk = 200k x

10%
20,000
Multi-point probability analysis

For any risk, a range of possible outcomes is more likely. An output
probability distribution provides a more complete picture of the possible
outcomes and recognises that some of these outcomes are more likely to
occur than others. An expected outcome is the average of all possible
outcomes, taking into account their different probabilities. An example is
given below:
Case study: expected costs of a construction project using multi point
analysis
It is estimated that a particular facility will cost 50m to build. The
expected costs associated with construction cost uncertainties have been
calculated as follows:
Possible cost
(m)
Difference from
estimated cost
(m)
Estimated
probability of
the event
occurring
Risk value (m)
45
-5
0.1
-0.5
50
0.6
55
+5
0.1
+0.5
60
+10
0.1
+1.0
65
+15
0.1
+1.5
The most likely outcome is that of no extra cost, as this outcome has the
56
highest probability (60%). However, the expected outcome the sum of

each possible outcome multiplied by its probability is an additional cost of
2.5 million. This needs to be calculated in NPV terms, taking into account
the time period over which the risk occurs.
Decision trees
Decision trees can be useful in this context. They are graphical
representations useful in assessing situations where the probabilities of
particular events occurring depend on previous events, and can be used to
calculate expected outcomes in more complex situations. For example, the
likelihood of a particular volume of traffic using a road in the future might
depend on movements in the oil price. Different scenarios can be analysed
in this way.
Monte Carlo and Latin Hypercube
There are a variety of packages available that take the analysis of risk a
step further, using probability distribution.
Monte Carlo analysis is a risk modelling technique that presents both the
range as well as the expected value of the collective impact of various risks.
It is useful when there are many variables with significant uncertainties.
However, expert advice is required to ensure it is applied properly,
especially when risks are not independent of each other. Before undertaking
or commissioning such an analysis, it is useful to know how data will be fed
into the model, how the results will be presented, and how decisions may
be affected by the information generated.
Latin Hypercube is a recent development in sampling theory, designed to
reproduce accurately the input distribution through sampling using fewer
iterations compared with the Monte Carlo approach. The distinguishing
feature of Latin Hypercube sampling is stratification of the input probability
distributions. A sample is then chosen from each stratified layer of the input
distribution. Sampling is forced to represent values in each layer and thus
recreates the input distribution. Convergence tests show that this method of
sampling converges faster on the true distributions compared with Monte
Carlo sampling.
Risk weighting and scoring
The weighting and scoring of risk is similar to the approach for evaluating
the non-financial benefits. It should be undertaken as follows:
exclude all the risks which can be measured financially
57
select an expert and representative team to weight and score the

risks for each short-listed option
assess the impact of each risk (high, medium, low) and score (0 to 10)
assess the likelihood of the risk occurring (high, medium, low) and
score (0 to 10)
calculate the expected score for each risk by multiplying the impact
and likelihood scores
rank the options in terms of their risk and identify the preferred
option on the basis of the highest score.
The full involvement of stakeholders and customers (users) is very important

when evaluating non-financial risks.
Action 13 select preferred option and undertake sensitivity analysis
This action is concerned with identifying the preferred option for delivering
the scheme and with testing its robustness through sensitivity analysis.
Identifying the preferred option
If the required analyses have been undertaken rigorously, selecting the
preferred option should be a reasonably straightforward step in the decision
making process. The business case should present the information succinctly
and clearly to help senior management reach the decision. The following
format should be completed for each option:
Option
Undiscounted
Capital
Revenue
Sub-total
Cost of risk
Total cost/ NPC
- Cash releasing
benefits
- Non-cash releasing
benefits
Net present value
(NPV)
Benefits (non-financial)
score
Risk (non-financial)
score
58
Discounted
The values of costs, benefits and risks are not always comparable, because
some benefits and risks are non-quantifiable. Therefore, where an option
has higher benefits, the investing organisation needs to decide whether
these benefits justify a higher net present cost and higher risk. If the
additional benefits are not sufficient to justify the additional costs and
risks, a lower cost and risk option should be selected.
Often a choice will remain between high cost/high benefit options and low
cost/low benefit options. In these circumstances, the organisations senior
managers and stakeholders must decide to what extent the higher benefits
are worth paying for. The final choice of the preferred option lies with
senior management and their stakeholders, drawing on professional advice.
Sensitivity analysis
An expected value is a useful starting point for undertaking the impact of
risk between different options. But however well risks are identified and
analysed, the future is inherently uncertain. So it is also essential to
consider how future uncertainties can affect the options.
Sensitivity analysis is fundamental to appraisal. It is used to test the
vulnerability of options to unavoidable future uncertainties and to test the
robustness of the ranking of the options. It involves testing the ranking of
the options by changing some of the key assumptions. However, spurious
accuracy should be avoided and it is essential to consider how the
conclusions may alter, given the likely range of values that key variables
may take. Therefore, the need for sensitivity analysis should always be
considered and dispensed with only in exceptional circumstances.
In itself, sensitivity analysis may not change the preferred option. However,
if small changes in the assumptions alter the ranking, it is an indication that
the investment process should proceed cautiously, because it has non-robust
elements in it. This means that a more detailed analysis and testing of the
costs, benefits and risks of some of the options should be considered.
Sensitivity analysis should be undertaken in two stages:
optimistic and pessimistic scenario analysis

switching values.
Scenario analysis
Scenarios are useful in considering how options may be affected by future
uncertainty. Scenarios should be chosen to draw attention to the major
technical, economic and political uncertainties on which the success of the
proposal depends.
59
Careful consideration should be given before running the scenario analysis

to the choice of circumstances, as sensitivity analysis does not simply
involve changing costs, benefits and risks by an arbitrary 10 or 20%; but
rather by the values that represent the most likely increases (or decreases)
in cost etc. for documented reasons.
Scenario analysis may take the form of asking simple what if questions for
small and medium size investments and extend to creating detailed models
of future states of the world for major programmes and projects. The
expected NPV is then calculated for each scenario.
Switching values
This technique highlights the point at which the choice of the preferred
option would switch to another option due to any uncertain costs and/ or
benefits.
The calculation of switching values is carried out by showing other options
in relation to the preferred option using percentages (the preferred option
is zero). This indicates by how much a variable would have to fall (if it is a
benefit) or rise (if it is a cost) to make it not worth undertaking the
preferred option. In other words how much variables would have to change
for the preferred option to be dislodged. This should be considered a
crucial input to the decision as to whether a proposal should proceed. It
therefore needs to be a prominent part of the appraisal.
Take as an example, a situation where the capital costs of the preferred
option are 10,000, those of option 1 are 5,000 and option 2 15,000. The
costs of the preferred option would therefore have to decrease by 50% to
equate to option 1 and increase by 50% to equate to option 2. As 50% either
way shows that there is a high level of sensitivity, further investigation using
scenario planning is worthwhile.
If the results for the scenario analysis are similar to the switching values,
further work is required on the options to determine their robustness.
Where appropriate, the sensitivity analysis of the economic appraisal
findings should include the following:
Category
Assumptions and Estimates
Costs and benefits
Capital costs
Lifecycle costs
Costs of core services
Costs of non-core services
Benefits valued in monetary terms
Qualitative benefits
Weights
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Scores
Timing
Delays in the project
More specifically, examples of variables that are likely to be both inherently

uncertain and fundamental to an appraisal are:
the growth of real wages

forecast revenues
demand
prices
assumptions about the transfer of risk.
A prior understanding of how costs fall into fixed, step, variable and semivariable categories can help in understanding the sensitivity of the total
costs of proposals.
Final selection of the preferred option
If a full cost benefit analysis has been undertaken, the best option is likely
to be the one with the highest risk adjusted NPV. To the extent that all
costs, benefits and risks have been valued robustly, this guideline can be
applied with more certainty.
In cost effectiveness analysis, the option with the lowest net present cost
should be the preferred option, again assuming that the cost estimates are
as accurate and reliable as possible.
If there is an affordability ceiling (constraint) then the combination of
proposals should be selected that optimises the value of benefits. The ratio
of the NPV to the expenditure falling within the constraint can be a useful
guide to developing the best combination of proposals. However, in most
cases, it should not be assumed too readily that additional monies will not
be made available to fund the proposal which offers demonstrably better
VFM.
In practice, other factors will also affect the selection of the preferred
option in particular, consideration of the unvalued costs (if any), nonfinancial benefits and risks. However, as the scores are not expressed in
monetary terms, judgment is required to compare the results of weighting
and scoring with the cost benefit or cost effectiveness analysis. The two
analyses should complement each other and may indicate that further
analysis is required before the final decision can be reached. Fully involving
stakeholders is very important in making judgments between financial and
non financial effects.
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The results for each short-listed option should be shown as follows:

Evaluation results
Option 1
Option 2
Option 3
Option 4
Do
Minimum
PSC
PSC more
ambitious
PSC less
ambitious
Economic
appraisals
Non-financial
benefits appraisal
Non- financial risk
appraisal
Overall ranking
Other methods pay back period and internal rate of return
The pay back period is sometimes put forward as a decision criterion. But
pay back ignores the difference in values over time and the wider impacts
of the proposal. These drawbacks mean it should not generally be used as a
decision criterion.
Similarly the internal rate of return should be avoided as the decision
criterion. Whilst it is very similar to NPV as a criterion, there are some
circumstances in which it will provide different, and incorrect, answers. For
example, IRR can rank projects that are mutually exclusive differently from
NPV.
Both methods may, however, prove useful in assessing the financial as
opposed to economic impact of the preferred option: see financial case
(step 6).
There should now be a clear understanding of the preferred option, which is
supported and evidenced by:
a revisited and updated OBC long list

a revisited and updated OBC short list
economic appraisals (NPVs) for the short-listed options risk adjusted
(in s) and applying optimism bias
assessments of both the non-financial risks and benefits
an assessment of the uncertainties (sensitivity analysis)
a detailed description of the preferred option.
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Output for step 4

The first draft of the OBC economic case has now been completed.
Introduction
This represents a departure from the past inasmuch as the commercials for
the potential scheme have too often been left for detailed consideration
until after the approval of the OBC, prior to the commencement of the
procurement process.
The advent of Gateway 2 (procurement strategy) following the production of
the OBC has reinforced the need to prepare for the potential deal at this
stage.
The main actions within this step are as follows:
Stages
Phase 2
planning
Step 4
Development Process
Deliverables
Determining potential value for money (VFM)
Step 5
Preparing for the potential deal
Economic case
- Part 2
Commercial
case
Action 14
Action 15
Action 16
Action 17
Action 18
Determine procurement strategy

Determine service streams and required outputs
Outline potential risk apportionment
Outline potential payment mechanisms
Ascertain contractual issues and accountancy
treatment
Action 14: Determine procurement strategy

The procurement strategy focuses on how best the required services and
outputs can be procured. Strategic considerations typically range from
whether the organisation should act as a single entity, or procure
collaboratively with others, to the method of procurement to be adopted
dependent on the need to consult with the supply-side.
The key point is that public sector organisations should act in compliance
with the government agreement (WTO) and the EU consolidated public
sector procurement directive (2004) which foster open markets and the
pursuit of VFM through the competitive process.
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Collaborative procurements
These strategic and ad hoc arrangements (at national, departmental/sector
and local level) offer significant flexibility and potential VFM (through
economies of scale) and a considerable reduction in procurement costs
(through pre-competition) as a result, they should be considered at the
outset.
Collaborative procurements range from pre-competed arrangements and
prices at national level (for example, the e.Government Unit within the
Prime Ministers unit for information technology), to departmental and more
local arrangements involving call-off contracts and management
frameworks for specified supplies and services.
Refer to the Office of Government Commerce (OGC) and/or your
departmental or local centre of excellence for procurement for assistance.
Procurement methodologies
A recognised procurement methodology should be used. The approach
depends on what is being procured (build, IT etc) and is based on accredited
standards for the sector.
Again, the OGC and/or your departmental or local centre of excellence for
procurement will be able to assist.
EU rules and regulations
The relevant UK procurement regulations which apply to most significant
schemes are:
Public Works Contracts Regulations 1991 (SI 1991/2680)

Public Services Contracts Regulations 1993 (SI 1993/3228)
Public Supply Contracts Regulations 1995 (SI 1995/201).
These regulations enact EC Directives under UK Law. The regulations apply

to contracts with a value over the following thresholds as of 31 January
2006:
Public Works 3,611,319 (Euros: 5,278,227)

Public Services 93,738 (Euros: 137,000)
Public Supply 93,738 (Euros: 137,000).
These thresholds are updated every two years.

You should note that the Public Supply Contracts Regulations (1995) draws a
distinction between central government bodies and other public sector
contracting authorities. For the latter, the relevant threshold for public
services contracts and public supply contracts is 144,371 (Euros 211,000).
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Official Journal of the European Union (OJEU)

It is obligatory to advertise procurements above the thresholds set out
above in the OJEU. Below these thresholds, procurements may be
advertised in Government Opportunities and/or Contax Weekly and other
trade periodicals, national and local newspapers as the purchaser deems
necessary.
The use of a Periodic Indicative Notice (PIN) should also be considered.
Open, restricted and negotiated procedures
Contracts have been awarded traditionally under one of three procedures:
open, restricted and negotiated. The key differences are as follows:
under the open procedure there is no pre-qualification stage and any

number of contractors can respond to the OJEU notice
under the restricted procedure the client can confine discussions to a
sample of those suppliers who have responded to the OJEU notice.
However, this discussion is limited to issues of clarification rather
meaningful negotiation
under the negotiated procedure the client is allowed to pre-qualify
bidders and to conduct limited negotiations with those who satisfy
the project requirements. Until recently this approach was used for
most significant procurements.
Competitive dialogue procedure (2004/18/EC)

There is now a new procedure for complex projects, where there is a need
for the contracting authorities to discuss all aspects of the proposed
contract with candidates. This is the competitive dialogue procedure
introduced in the public sector procurement directive (2004/18/EC),
implemented in the Public Contracts Regulations (SI 2006/5) with effect
from 31January 2006.
The main features under this procedure are:
dialogue is allowed with selected suppliers to identify and define

solutions to meet the needs and requirements of the contracting
authority
the award is made on the most economically advantageous tender
criteria
dialogue may be conducted in successive stages, with the aim of
reducing the number of solutions/bidders
there are explicit rules on post-tender discussion.
Such dialogue was never possible under the open and restricted procedures.
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There is now a presumption that the negotiated procedure will be used only
in limited circumstances and that the competitive dialogue approach will
apply to significant and complex public sector procurements requiring
dialogue with the supply-side during procurement.
Selection of a preferred bidder
If a preferred bidder is to be selected during the procurement phase, then a
full explanation must be provided with the supporting rationale. This should
also set out how the VFM imperative will be maintained throughout the
continued negotiation phase of the procurement.
Procurement plan proposed implementation timescales
The procurement timetable must be shown together with the proposed
timetable for the implementation of the potential deal. This applies to all
procedures. In the case of the competitive dialogue procedure
(2004/18/EC) the following information is required:
Stage
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
Duration
Planned enddate
OJEU notice
Pre-qualification questionnaire
(PQQ)
Select participants
Invitation to participate in dialogue
Dialogue phase (including number of
solutions and bidders)
Final tenders
Evaluation of tenders (including
clarification, specification and fine
tuning)
Selection of preferred bidder and
notification to PB and other bidders
(commence 10 day standstill)
PB clarification and confirmation of
commitment
Award of contract
Desired receipt of services phased
as required
Draft OJEU notice

The draft OJEU notice must be attached to the OBC if applicable. This
must have been reviewed and approved by legal and procurement experts.
Evaluation criteria
66
The evaluation criteria for the various stages of the procurement should also
be attached. There is a legal requirement to have agreed these prior to the
formal commencement of the procurement. Again, this should have been
reviewed and approved by legal and procurement experts.
Action 15: determine service streams and required outputs
The purpose of this action is to capture the scope and content of the
potential deal. Generally, there are a number of fundamental principles to
bear in mind:
as far as possible, requirements must be specified in terms of the

desired outcomes and outputs to be produced. Therefore, the focus
should not generally be on the processes which produce them or the
inputs and technologies required
the quality attributes of the services and outputs required and the
performance measures against which they will be assessed must be
specified
the deal must allow scope for the prospective service providers to
suggest innovative ways of meeting the service requirements,
including proposals which may require rethinking the business
processes in place within the procuring organisation.
Services and required outputs

This section should summarise briefly the required services and outputs and
the potential implementation timescales required.
Consideration should be given to capturing most, if not all, of the following
details:
the business areas affected by the procurement

the business environment and related activities
the business objectives relevant to the procurement
the scope of the procurement
the required service streams
the specification of required outputs
the requirements to be met, including: essential outputs, phases,
performance measures, and quality attributes
the stakeholders and customers for the outputs
the possibilities for the procurement including options for variation
in the existing and future scope for services
the future potential developments and further phases required.
Implementation timescales
This section should outline key milestones for delivery of the related
services and outputs by the potential service provider. The focus here is on
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the deal to be negotiated and not on the procurement and project plans per
se.
Where possible, more detailed information about the requirements should,
be annexed to the OBC for example, the statement of service
requirements and the statement of needs (or output based specification).
Action 16: outline potential risk apportionment
The purpose of this action is to consider how the service risks (design, build
funding and operational) may be apportioned between the public and
private sectors. This is especially important when the successful delivery of
the scheme is subject to significant risk, and not associated with the
delivery of PPP/PFI schemes per se.
The governing principle is that risk should be allocated to the party best
able to manage it, subject to the relative cost. Therefore, the optimal
allocation of risk, rather than the maximising of risk transfer is the prime
objective; and it is vital that the best solution is found. This action provides
the starting point.
Guiding principles
The principles that should underpin this action are:
the degree to which risk may be transferred depends on the specific

proposal under consideration
successful negotiation of risk transfer requires a clear understanding
by the procuring authority of the risks presented by a proposal, the
broad impact that these risks may have on the service providers
incentives and financing costs (cost drivers) and the degree to which
risk transfer offers VFM hence the need to identify and cost
individual risks
where the private sector has clear ownership, responsibility and
control, it should be encouraged to take all of those risks it can
manage more effectively than the procuring authority. If the public
sector body seeks to reserve many of the responsibilities and controls
that go hand-in-hand with service delivery and yet still seeks to
transfer significant risk, there is a grave danger that the private
sector will increase its prices
appropriate transfer of risk generates incentives for the private
sector to supply timely, cost effective and more innovative solutions.
As a general rule, the public sector should consider transferring risk
to the private sector when the service provider is better able to
influence the outcome than the procuring authority.
A risk allocation table (or risk transfer matrix) should be incorporated in

this section (see below for an example format). This should illustrate the %
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of risk being borne. Ideally you should use percentages however, if this is
not feasible at this stage, use ticks.
Risk Category
Potential allocation
Public
Private
Shared
1. Design risk
2. Construction and
development risk
3. Transition and
implementation risk
4. Availability and
performance risk
5. Operating risk
6. Variability of revenue
risks
7. Termination risks
8. Technology and
obsolescence risks
9. Control risks
10. Residual value risks
11. Financing risks
12. Legislative risks
13. Other project risks
Action 17: outline potential payment mechanisms

This action considers and records how we intend to make payment over the
life span of the contract.
Importantly, it considers how we intend to incentivise our service provider
to continue to provide VFM over time, and helps us deal with the inevitable
business and service change encountered in the longer-term. It also explains
how we intend to tie down the risks identified and allocated in the
previous action within the payment, or charging, mechanism for the
potential deal.
The payment mechanism is the formula against which payment for the
contracted services will be made. The underlying aim of the payment
mechanism and pricing structure is to reflect the optimum balance between
risk and return in the contract. As a general principle, the approach should
69
be to relate the payment to the delivery of service outputs and the

performance of the service provider.
If it is properly constructed, the payment mechanism will incentivise the
service provider to deliver services in accordance with the business
imperatives of the public sector in the following phases of the service:
the pre-delivery phase up to the acceptable delivery of the service

and commencement of the payment stream
the operational phase following acceptable delivery of the service
up to the close of the primary contractual period
the extension phase post primary contract period.
The pre-delivery phase

Two charging mechanisms are important in the pre-delivery design and build
phases fixed price/costs and payment on the delivery of agreed outputs.
Fixed price/costs
The service provider must be given an incentive to deliver services to time,
specification and cost. This element involves a fixed price for the delivery
of agreed outputs within a fixed timetable, with appropriate remedies in
place for delays and cost over-runs.
Payment on the delivery of agreed outputs
This element links payment to the delivery of key service outputs and does
not commence until the contracted services come on stream, as agreed.
These payments may be staggered against the delivery of key outputs within
the overall implementation plan for the complete service. However, the
guiding principle is that a revenue stream to the service provider should
only commence when an off-setting benefit stream is realised on the part of
the public sector.
Ultimately, a service that fails to perform could result in termination of all
the payment streams and, in extreme circumstances, pass the rights to the
underpinning assets for the service to the public sector.
The operational phase
A number of mechanisms are relevant here each is discussed below.
Availability payment
This element links a proportion of the payment stream to the availability of
the service. For example, the contract could stipulate that the service must
be available for a minimum of 95% of the time between contracted hours.
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In such instances, the procuring authority will need to negotiate service

level agreements (SLAs), which outline the availability criteria. In some
cases, it may be appropriate to treat availability as a threshold which
releases a payment stream based on a combination of other factors for
example, performance or throughput of service.
Failure on the part of the service provider to meet the agreed availability
criteria should lead to reduced payments and, ultimately, to cessation of
the service.
Performance payment
This element links a proportion of the payment mechanism to the
performance of the service. Linking payments to specified performance
targets helps to ensure that the service provider continues to deliver the
agreed outputs throughout the life span of the service.
Transaction/volume payment
This element links a proportion of the payment mechanism to the
achievement of business benefit for example, the number of transactions
or volume of business provided.
Linking payment to the productivity or usage of the service in this way gives
the service provider the incentive to optimise the level of productivity and
to invest further in the underlying infrastructure, if increased levels of
productivity are required.
Incentive payment
This element of the payment mechanism is linked to potential
improvements in the overall performance of the public sectors business
processes; and encourages the service provider to deliver new ways of
working and additional benefits that can be shared by both parties.
Cost of change
This element of the payment mechanism seeks to minimise the cost of
change by encouraging the service provider to build flexible and adaptable
solutions in the first instance.
The cost of change represents a major risk to the public sector and should
be mitigated through the contractual obligation to benchmark and market
test the contracted services at regular intervals.
If it is not possible to agree exact prices for anticipated changes at some
future time, the process for agreeing the cost of change should be
established at the outset.
71
Third party revenues

This element of the payment mechanism gives the service provider the
incentive to develop and exploit alternative revenue streams and new
business, wherever possible without prejudice to the standing of the public
sector.
The price for core services will be reduced and overall VFM improved, if the
scope for these potential revenue streams has been recognised and agreed,
in principle, at the outset.
The extension phase
Technological obsolescence
During the operational phase, the service provider is delivering the service
for an agreed revenue stream and will naturally invest in alternative ways of
working and new technologies if this allows overall costs to reduce and
profit margins to improve.
Two contractual devices can be employed to encourage the service provider
to consistently upgrade the core technology. First, various upgrades can be
included in the initial price to ensure that the infrastructure underpinning
the service is kept up-to-date; and second, a proportion of the service
providers initial recoverable investment could be deferred with
agreement until the end of the contractual period.
Contract currencies
Contract currencies are the variable measures that make the payment
mechanism meaningful and effective in the service contract for example,
the number of complaints received; the proportion of users of the service
requiring assistance etc.
The aim should be to choose contract currencies which demonstrate
productivity and performance. In other words, comparative measures which
provide service providers with the incentive to improve a reduced payment
for under performance and enhanced payments for performing in excess of
the minimum requirement specified in the contract.
Action 18: ascertain contractual issues and accountancy treatment
This action outlines the contractual arrangements for the procurement,
including the use of a particular contract, the key contractual issues for the
deal and its accountancy treatment and personnel implications (if any).
Use of contract
The standard form of contract to be used must be stated.
72
Refer to the OGC and/or your departmental or local centre of excellence for
procurement for assistance.
Key contractual issues
Contract management arrangements and key contractual issues should be
considered and recorded in the OBC. These will vary from deal to deal but
in most instances the principle areas of the contract may be categorised and
appraised as follows:
the duration of the contract and any break clauses

the service providers and procuring authoritys respective roles and
responsibilities in relation to the proposed deal
the payment or charging mechanism, including prices, tariffs,
incentive payments etc
change control (for new requirements and updated services)
the organisations remedies in the event of failure on the part of the
service provider to deliver the contracted services on time, to
specification and price etc.
the treatment of intellectual property rights
compliance with appropriate regulations etc
the operational and contract administration elements of the terms
and conditions of service
arrangements for the resolution of disputes and disagreements
between the parties
the agreed allocation of risk
any options at the end of the contract.
Accountancy treatment
This section should provide details of the intended accountancy treatment
for the potential deal, by stating on whose balance sheet public or private
sector, or both the assets underpinning the service will be accounted for;
and the relevant accountancy standard(s).
Personnel implications
Public sector organisations are legally and morally obliged to involve their
staff and their representatives in a process of continuous dialogue during
significant projects involving considerable internal change. This also
represents best practice in terms of human resources policies.
Consequently, the OBC should state explicitly whether there are any
personnel implications to the scheme. In particular:
whether the Transfer of Undertakings (Protection of Employment)

Regulations 1981 (TUPE) will apply, directly or indirectly
details of any terms regarding subsequent transfers at market testing
intervals (if these apply)
73
descriptions of terms regarding Trade Union recognition (if these

apply)
details of requirements for broadly comparable pensions for staff
upon transfer (if these apply)
(within the public sector) that codes of practice are in place for the
well being and management of staff. The OBC should confirm that
these have been adhered to (if applicable).

There should now be a clear understanding of:
the procurement strategy, including the proposed procurement

methodology and the use of EC/WTO procurement processes
the scope of the potential deal and required services
implementation timescales for the proposed deal
the supporting payment (or charging) mechanism
the (recognised) contract being proposed for use and key contractual
issues, including TUPE (if applicable)
a draft OJEU notice and statement of requirements (to support the
above).
Output for step 5

The first draft of the commercial case has now been completed.
Introduction
The purpose of this step is to ascertain the affordability and funding
requirements of the preferred option, in relation to the other short-listed
options; and to demonstrate that the recommended deal is affordable.
In practice, this involves determining:
the financial profile of each of the short-listed options

the impact of the proposed deal its capital and revenue
consequences on the organisations prices (if any), income and
expenditure account and balance sheet.
The main action within this step is shown below:

Stages
Phase 2
planning
Step 4
Development Process
Deliverables
Economic case
74
Step 5
Step 6
Ascertaining affordability and funding

requirement
Prepare financial model and financial appraisals.
Action 19
part 2
Commercial
case
Financial case
Focus of the financial appraisals

Many practitioners of investment appraisal confuse the financial appraisals
with the economic appraisals. The economic case focuses on VFM, taking
into account resource costs and benefits. In contrast, the financial case
focuses on affordability of the options appraised in the economic case,
with particular emphasis on the preferred option.
The costs and benefits appraised in the financial case reflect an
accountancy based perspective. Consequently, both the resource and nonresource costs and benefits are factored into the analysis. For example,
whereas we exclude VAT and capital charges (including depreciation) from
the economic appraisals, these costs must be included in the financial
analysis, because they have a direct bearing on the affordability of the
options under consideration.
The key differences between economic and financial appraisals can be
summarised as follows:
Economic Appraisals
Financial Appraisals
Focus:
VFM net present value/cost
(NPV/NPC).
Focus:
Affordability cash flow.
Coverage:
Wide coverage Government
and society (UK Ltd).
Coverage:
Relevant organisation(s).
Relevant standards:
Relevant standards:
HM Treasury Green Book rules.
Organisational accounting
rules and standing orders.
Discount rate (3.5%) applied.
Analysis:
Constant (real) prices
Includes opportunity cost
Includes indirect and
attributable costs costs of
Analysis:
Current (nominal) prices
Benefits cash releasing only
Includes transfer payments
(for example, VAT)
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others
Includes all quantifiable costs,
benefits and risks
Includes environmental costs
Excludes all Exchequer
transfer payments for
example, VAT
Excludes general inflation
Excludes sunk costs
Excludes depreciation and
capital charges.
Includes inflation
Includes depreciation and
capital charges.
The following financial statements are required for all projects:
a budget statement, which should be based on resource accounting

and budgeting (RAB) principles, and show the resource costs over the
life time of the proposal. For strategic initiatives, the budget will
often comprise the forecast RAB financial statements of the whole
organisation over a number of years
a cash flow statement, which should show the cash which will be
spent on the lead option, if it goes ahead. The existing spend (if any)
and the additional spend should be shown separately
a funding statement, which should show which internal departments,
partners and external organisations will provide the resources
required. Where external funding is required, a written statement of
support from the projects stakeholders or commissioners is needed.
The above should include the contingencies (in s) necessary to ensure that
there is sufficient financial cover for risks and uncertainties.
Financial modelling
For larger, more significant and complex schemes, a financial model of the
proposed investment needs to be constructed. In its early stages this
comprises of a best guestimate of the likely impact and outcomes of the
proposed deal. However, the model should be revised as new and better
information becomes available.
Specialist advice should be sought from accountants and other expert
advisers. The organisations director of finance should play a lead role in
building and maintaining the model. If external management consultants are
appointed to undertake this work, the structure of and inputs to the model
still need to be vetted by the senior responsible owner and the director of
finance.
The minimum requirements for most projects are as follows:
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Minimum requirements for a financial model
recording a description of the model and the associated methodology

agreeing and recording the underlying assumptions (for example,
interest rates, inflation, taxation, capital charges, depreciation etc.)
detailing the proposed funding structure
preparing the inputs schedules (financial costs, cash-releasing
benefits and risk contingencies)
preparing the projected profit and loss
preparing balance sheet projections
undertaking cash flow projections
preparing funding schedules
calculating project returns for the different elements of financing
preparing supporting schedules i.e. for loans, fixed assets, taxation,
and payments.
Capital and revenue requirements

Following on from the modelling exercise, a statement showing the capital
and revenue requirements for the recommended deal should be prepared.
This should set out:
the capital and revenue consequences of the preferred option over

the life span of the service and/or contract period
how this compares with the original capital ceiling for the scheme (if
any)
any shortfall in capital and revenue requirements (the funding gap).
This statement should also indicate the capital sum being requested and,
ideally, that the organisation has sufficient income to meet the ongoing
costs of the project. The minimum requirement is as follows:
Summary of financial appraisal
xxx
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
Preferred option:
Capital
Revenue
Total
Funded by:
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Existing
Additional
Total
Net effect on prices
It may also be necessary to assess the implementation impact of the
proposed deal on any contract prices that the organisation (for example,
Government Trading Fund or NHS Trust etc. has to charge for its services.
Costs will have to be covered by income year by year and the organisation
must be confident that existing customers will continue to contract for
services, or that new purchasers will secure additional contracts.
In considering the impact on prices, capital charges must also be
considered. Capital charges are significant when considering the
affordability of a development and they must be included in year by year
financial projections, together with external financing limit (EFL)
allocations, running costs and contract income from any purchasers.
The benefits that the proposed deal will deliver and the prices that the
organisation will charge as a result will also have an impact on
competitiveness. Organisations therefore also need to compare and
benchmark the prices and quality levels of comparable services offered by
other providers.
The effect on prices should be analysed in enough detail for purchasers to
see clearly how the scheme will impact on them. This means considering the
impact on:
the organisations prices as a whole

the prices for individual services
the price of specific contracts.
In general, public sector investments are difficult to justify if they lead to

an increase in prices for the organisations services.
Impact on the income and expenditure account
The impact of the project on the organisations income and expenditure
should be assessed. Both the current position and the likely outcome should
be fully recorded in the OBC by a qualified accountant who understands the
project and the organisations business.
Impact on the balance sheet
The impact of the project on the organisations balance sheet should also be
assessed. Both the current position and the likely outcome should be fully
78
recorded in the OBC by a qualified accountant who understands the project

and the organisations business.
Where significant assets are an integral part of the investment, their
accounting treatment will need to be examined (see commercial case). This
will require an independent opinion from the organisations auditors.
Stakeholder(s)/ commissioner(s) support
Affordability issues are one of the main reasons for delay at the point at
which business cases are submitted for approval.
It is unlikely that an OBC will be successful unless consultation has been
held along the way between the organisation seeking investment for the
improved services and its stakeholders/ commissioners/ purchasers, and
other interested parties.
It is crucial to the overall process that agreement, in principle, is obtained
from the purchasers for the scheme. This should be in written form and
included in the annex to the OBC. An indication of what this should cover
using the example of a commissioner is shown below.
Issues to cover in a letter of commissioner(s) support
A commissioners letter should:
demonstrate that the main commissioner and other commissioners

have been actively involved in developing the scheme through its
various stages
confirm acceptance of the strategic aims and investment objectives
of the scheme, its functional content, size and services
confirm that the financial costs of the scheme can be contained
within the agreed and available budget and a willingness and ability
to pay for the services at the specified price level
state the margins of leeway beyond which support must be revalidated
demonstrate that suitable contingency arrangements are in place to
work with the provider to address any current or unforeseen
affordability pressures
be provided by the appropriate individual(s) within the organisation
usually the chief executive officer.
Assessing affordability
Assessing affordability requires sound judgment of the organisations
business and requires that:
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i) the balance sheet has been correctly organised and properly accounts
for current assets, current liabilities, long-term liabilities and capital
ii) the balance sheet of the organisation is in a healthy state
iii) the organisation is solvent
iv) the organisation is not over-trading
v) the cash flow of the organisation is sound
vi) the necessary allowance has been made for risks.
Various techniques can be used by public sector organisations to help judge
affordability. These are in extensive use within the private sector and are
discussed below:
The balance sheet items i and ii
This involves an assessment of working capital, which is defined as follows:
Working capital = current assets current liabilities
An organisation should never run short of working capital or over-capitalise.
This is a common reason for business failure. A ratio of current assets to
current liabilities of 2:1 is generally agreed to be the minimum working
capital ratio. The ratio is calculated as follows:
Working capital =
current assets
current liabilities
Solvency item iii

This means that the organisation can meet any debt obligation in the near
future without jeopardising the liquidity of the business.
Over-trading item iv
This links in with over-capitalisation, where the organisation is running short
of working capital as a result of having acquired too many assets, leaving
itself short of cash for operational expenses.
In this situation attention must be paid to the organisations cash flow; but
it is first necessary to consider the return on capital employed and the
return on capital invested.
The return on capital employed enables us to compare the receipts (or
profits) earned with the capital employed to earn them, and may be
calculated as follows:
Return on capital employed = net receipts (or profits)
capital employed
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The return on capital invested calculates what the return was overall on the
capital used and takes into account the lost opportunity or opportunity
cost of the capital employed. As such it is calculated as follows:
Return on capital invested =
net profit opportunity cost

capital invested
Cash flow item v

Assessing cash flow should take into account:
the pattern of business activities and trading generally

budgeting for cash flow a forecast which looks ahead and envisages
the likely income and expenditure
an assessment of the cash balance at the end of a particular period.
Risks item vi
There are a number of risks which could affect the affordability of the
project. The OBC should summarise the results of the risk contingencies and
sensitivity analysis which underpin the financial case.
The risks and uncertainties will vary from project to project, but some key
questions to consider are:
would the project be affordable if capital costs were to be 10% higher

than expected?
what if the expected savings were to fall by 10%?
what circumstances might cause saving targets to be breached?
what if income to the organisation were to be reduced by 5% or more?
is there a robust strategy in place to guard against these outcomes?
Pay back period

Finally, there is the pay back period. As implied by the term, this method
measures the rate at which the financial benefits from the investment pays
back the initial investment costs. In general, projects with a short pay back
period are preferable to those with long pay back periods.
Closing affordability gaps
Affordability problems are most likely to occur in the early years of the
project i.e. in the construction and development phase. Benefits are
unlikely to be realised in large measure during this phase to offset the costs
of the investment.
However, during the operational phase benefits can be expected to build up
gradually, until they reach the point where the net impact on operating
costs and prices to purchasers is negative.
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If the affordability analysis reveals the preferred option is unaffordable,

there are a number of potential remedies including one or more of the
following:
phasing the implementation of the preferred option differently

adopting a different design solution
altering the scope of the preferred option for example, its
functional content or the quantity and quality of the services offered
finding additional sources of funding for example, disposal of
surplus assets (if available), further revenue support from the
commissioners of the organisations services
considering different ways of financing the project for example,
private finance, operating and financial leases
negotiating more competitive or flexible prices from the service
provider(s)
finding other ways of reducing the costs and/or increasing cash
releasing savings
allowing the service provider to create additional revenue streams
and new business and sharing in the resultant revenue streams.

There should now be clear understanding of:
the capital and revenue implications of the preferred option and deal
the impact on the income and expenditure account and the
organisations charges for services (if applicable)
the impact on the budget, other sources of available funding and any
shortfalls
the impact on the balance sheet.
There should also be written evidence of commissioner and stakeholder

support.
Output for step 6
The first draft of the financial case has now been completed.
Introduction
The perfect deal, offering optimum VFM, can end up being an unmitigated
disaster unless the management arrangements are thought through early on
in the scoping and planning process. This step is concerned primarily with
putting in place all the arrangements that are required to ensure the
successful delivery of the scheme and to guard against these causes of
project failure.
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The following actions are required to complete this step successfully:

Stages
Development Process
Phase 2
planning
Step 4

Economic case
part 2
Step 5
Step 6

requirement
Commercial
case
Financial case
Step 7
Planning for successful delivery
Action 20
Plan project management strategy, framework

and outline plans
Plan change management strategy, framework
and outline plans
Plan benefits realisation strategy, framework
and outline plans
Plan risk management strategy, framework and
outline plans
Plan post project evaluation strategy,
framework and outline plans
Action 21
Action 22
Action 23
Action 24
Output:
Outcome:
Review Point:
Deliverables
Management
case
Outline Business Case

Planned procurement for VFM solution
Gateway 2: procurement strategy
Action 20: Plan project management strategy, framework and outline

plans
This action is concerned with putting in place the strategy, framework and
outline plans required for successful delivery using a robust project
management methodology to guide the project through a controlled, well
managed and visible set of activities to achieve the desired results and
benefits.
Project management strategy
The strategy of most organisations for the successful delivery of projects is
to embrace the principles of programme management and adopt a project
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methodology which is based on its perceived standards of best practice and

quality management principles.
The OGC has developed extensive guidance on programme management.
This should be used by all public sector organisations, in the absence of
their own approved departmental methodologies.
Project management: PRINCE 2
The recommended project methodology within the public sector is PRINCE Projects IN Controlled Environment, which is now the de facto standard in
use within the United Kingdom.
PRINCE 2 covers the project life cycle from start-up to closure. It provides a
number of mechanisms and reporting arrangements to ensure project
planning and monitoring are carried out rigorously. It is based on the
following key principles and should be used on all occasions:
a project is a finite process with definite start and end dates

a project always needs to be managed in order to be successful (by a
qualified PRINCE practitioner)
for genuine commitment to the project, all parties must be clear
about why the project is needed, what it is designed to deliver, how
the outcomes are to be achieved, and a clear definition of roles and
responsibilities.
Project framework
The project framework refers to the organisation of the project.
This section should summarise:
the projects structure

its reporting arrangements in relation to its over-arching programme
any other management and governance arrangements
its key roles and responsibilities
its appointed personnel (together with copies of their curriculum
vitas)
any vacancies (together with a description of how individuals will be
recruited to fill them).
Much of the above information should typically be captured in a diagram of

the organisation within the OBC.
Importantly, PRINCE2 mandates that the project board must represent three
broad interests. These include:
a senior business role to represent the organisational interests

a senior user role to represent the end users or customers interests
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a senior technician to cover the technical aspects, including supplyside considerations.
In addition, best practice demands that stakeholders and commissioners

interests are also represented.
Appointment of the senior responsible owner (SRO)
Finally, in compliance with the OGC Gateway Review Process and/or more
local arrangements for health checks, a champion or senior responsible
owner should be appointed. This person should not be the programme
director or project manager for the scheme; or indeed any one with day-today involvement with the scheme. Rather the SRO should be the business
sponsor for the programme or project with the ultimate responsibility, at
board level, for the delivery of business benefits.
Project plan
The project plan is the document which describes how, when and by whom
a specific milestone or set of targets will be achieved. It is the detailed
analysis of how identified targets, milestones, deliverables and products will
be delivered to timescales, costs and quality.
The most up-to-date version of the project plan should be summarised
within the OBC and address the following:
the deliverables (or products) to be produced

the activities required to deliver them
the activities required to validate the quality of the deliverables
the resources and time needed for all activities and any need for
people with specific capabilities and competencies
the dependencies between activities and any associated constraints
when activities will occur
the points at which progress will be monitored, controlled and
reviewed this includes delivery and approval of the business case
and the undertaking of Gateway reviews/ health checks.
Project plans are typically illustrated by means of Gantt charts.

Use of special advisers
This is to be encouraged where the necessary skills and capabilities are in
short supply; especially in the case of large, significant, complex and novel
schemes.
Specialist advice will generally be brigaded within four key categories in the
project plan: financial, legal, technical and project management. The OBC
should indicate how and when this advice will be utilised along with
expected costs.
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Action 21: plan change management strategy, framework and outline

plans
This action is concerned with putting in place the strategy, framework and
outline plans required for successful delivery of change.
Most investments involve some degree of change. This can range from
elements of service improvement through to major change predicated on
business process re-engineering. Even where change is not ostensibly the
primary driver for investment (as in the case of a replacement service)
every effort should be taken to seize the opportunity for improvement on
the basis of invest to save and deriving a net present value for the project.
The change required (and expected) needs to be managed and embraced by
the individuals within the organisation(s); hence the need for a change
management strategy (linked to benefits realisation); a change management
framework (to manage the change) and an outline plan (to explain what will
be delivered and when in terms of underlying activities).
Change management strategy
The main aim here is to assess the potential impact of the proposed change
on the culture, systems, processes and people working within the investing
organisation.
Various management strategies can be adopted for implementing change,
depending on the degree and pace of change required. In terms of degree,
the required change may range from the introduction of greater automation
through to the re-configuration of services or the complete transformation
of a business function in another scenario. In terms of pace, the change may
be big bang or incremental depending on the strategic driver for change in
the first instance and the ability of the organisation to cope in the second.
The organisations choice of change management strategy should be set out
in full, together with its underpinning communication and development
(training) strategies.
Change management framework
In some cases, responsibility for delivery of the service change may be
under the control of the project management board and be a key sub-set of
its activities. However, in the case of major organisational and business
change this is unlikely to be the case, and the project itself may form part
of a larger and longer-term change management programme. In these
instances, the organisational structure and personnel required to direct,
manage, implement and evaluate the change should be set out together
with the main roles and responsibilities of key personnel, and their
relationship to the project board.
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The details required in support of the project management framework (see

above) are relevant here.
Change management plans
Where there are significant change management programmes, an outline of
the change management plan should be set out together with the
communication and developmental deliverables (for example, training
products) required for the implementation phase. It is important that this
indicates how all relevant personnel within the organisation, including
human resources and staff representatives, have contributed or been
involved to date.
The details required in support of the project management plan (see above)
are relevant here.
Action 22: plan benefits realisation strategy, framework and outline
plans
This action is concerned with putting in place the management
arrangements required to ensure that the project delivers its anticipated
benefit, or required rate of return. Far too little attention has been paid
to this key aspect in the past as a result, benefits claimed in the economic
case have not actually been realised and/or monitored through post project
evaluation.
It is important to note that the focus has now changed with the advent of
the Gateway Review/ Health Check 5 Review (benefits realisation) and the
increasing interest of the National Audit Office.
Benefits realisation strategy
The benefits realisation strategy should set out arrangements for the
identification of potential benefits, their planning, modelling and tracking.
It should also include a framework that assigns responsibilities for the actual
realisation of those benefits throughout the key phases of the project.
Benefits realisation framework
The ultimate responsibility for the delivery of benefits rests with the SRO
for the project, who must ensure that the management arrangements for
their realisation in the implementation and operational phase of the project
are outlined in some detail at the OBC stage.
Benefits register
At OBC stage, projects should capture the benefits already outlined for the
project (see economic case) within a benefits register. This register should
also indicate how those benefits are to be realised. The following
information should be captured for each benefit.
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Benefits Register
Benefits number
Benefit type
Description
Service feature
Potential dis-benefits
Activities required
Responsible officer
Performance measure
Target improvement
Full-year value
Timescale
(unique within the register)

(benefit category)
(what aspect of the project will give rise to the
benefit to facilitate monitoring)
(to secure benefit)
(expected level of change)
Action 23: plan risk management strategy, framework and outline

plans
This action is concerned with putting in place arrangements for the on-going
management of risk during the key phases of the project.
Risk management is a structured approach to identifying, assessing and
controlling risks that emerge during the course of the policy, programme or
project lifecycle. Its purpose is to support better decision making through
understanding the risks inherent in a proposal and their likely impact.
Effective risk management helps the achievement of wider aims, such as:
effective change management

the efficient use of resources
better project management
minimising waste and fraud
supporting innovation.
Risk management strategy

Strategies for the active and effective management of risk involve:
identifying possible risk in advance and putting mechanisms in place

to minimise the likelihood of them materialising with adverse effects
having processes in place to monitor risks, and access to reliable, upto-date information about risks
the right balance of control to mitigate against the adverse
consequences of the risks, if they should materialise
decision-making processes supported by a framework of risk analysis
and evaluation.
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At the level of individual policies, programmes and projects, risk

management strategies should be adopted in a way that is appropriate to
their scale.
Risk mitigation
Recognised methods for the mitigation of risk throughout the life span of
the policy, programme or project include:
early consultation. Experience suggests that costs tend to increase as

more requirements are identified. Early consultation will help to
identify what those needs are and how they might be addressed
avoidance of irreversible decisions. Where lead options involve
irreversibility, a full assessment of the costs should include the
possibility of delay, allowing more time for investigating alternative
ways to achieve the objectives
pilot studies. Acquiring more information about risks affecting a
project through pilot studies allows steps to be taken to mitigate
either the adverse consequences of bad outcomes, or to increase the
benefits of good outcomes
design flexibility. Where future demand and relative price are
uncertain, it may be worth choosing a flexible design adaptable to
future changes, rather than a design suited to only one particular
outcome. For example, different types of fuel can be used to fire a
dual fired boiler, depending on the future relative price of
alternative fuels. Breaking a project into stages, with successive
review points at which the project could be stopped or changed can
also increase flexibility hence the importance of adopting and
implementing the OGC Gateway process
precautionary principle. Precautionary action can be taken to
mitigate a perceived risk. The precautionary principle states that
because some outcomes are so bad, even though they may be very
unlikely, precautionary action is justified. In cases where such risks
have been identified, they should be drawn to the attention of senior
management and expert advice sought
procurement/contractual. Risk can be contractually transferred to
other parties and maintained through good contractual relationships,
both informal and formal see commercial case
making less use of leading edge technology. If complex technology
is involved, alternative, simpler methods should be considered,
especially if these reduce risk considerably whilst providing many of
the same benefits
reinstate, or develop different options. Following the risk analysis,
the appraiser may want to re-instate options, or to develop
alternative ones that are either less inherently risky or deal with the
risks more efficiently
abandon the proposal. Finally, the proposal may be so risky that
whatever mitigation is considered, it has to be abandoned.
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By reducing risks in these ways, the expected costs of a proposal are

lowered or the expected benefits increased. As can be seen, benefit and
risk are simply two sides of the same coin and successful management
depends on the effective identification, management and mitigation of risk.
Risk management framework
Public sector organisations should foster a pragmatic approach to risk
management at all levels. This involves:
establishing a risk management framework, within which risks are

identified and managed
senior management support, ownership and leadership of risk
management policies
clear communication of organisational risk management policies to all
staff
fully embedding risk management into business processes and
ensuring it is applied consistently.
These actions should help establish an organisational culture that supports

well thought out risk taking and innovation.
The arrangements for the management of risk should be outlined, together
with the respective roles and responsibilities and reporting lines of the posts
concerned. These should be made clear in relation to the overall project
management arrangements.
Risk register
The plans for the management of associated risks should be encapsulated
within the risk register for the project, which lists all the identified risks
and the results of their analysis and evaluation. Information on the status of
the risk is also included.
The risk register should be continuously updated and reviewed throughout
the course of a project and at this stage in its development cover all phases
of the project, with particular focus on the related project management
and procurement risks for the scheme. The information that a risk register
should contain for each risk is set out below:
Risk Register
Risk number
Risk type
Author
Date identified
Date last updated
Description
Likelihood
Interdependencies
(unique within the Register)

(who raised it)
(of risk)
(between risks)
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Expected impact
Bearer of risk
Countermeasures
Risk status
(action status)
Additional information on risk management may be obtained from the Office

of Government Commerce (OGC), the National Audit Office (NAO), HM
Treasury and the Cabinet Office.
Action 24: plan post project evaluation strategy, framework and
outline plans
As noted in the context of benefits realisation, this very important stage of
the project has been much neglected in the past to the extent that for
many projects it was not known whether they had delivered anticipated
benefits and expected returns. Neither was it possible to pass lessons learnt
on to others.
Post project evaluation strategy
The purpose of post project evaluation (PPE) is twofold:
first, to improve project appraisal at all stages of a project from

preparation of the business case through to the design, management
and implementation of the scheme. This is often referred to as the
project evaluation review (PER)
second, to appraise whether the project has delivered its anticipated
improvements and benefits. This is often referred to as the post
implementation review (PIR).
This section of the OBC should set out the organisations strategy for both
aspects of PPE. In particular, it should make clear:
whether the PER and PIR are to be undertaken jointly or separately

the OGC Gateways and Health Checks review process adopted in
accordance with accepted, recommended and prevailing best
practice.
PPE framework
This section should outline management arrangements for ensuring that PPE
will take place, bearing in mind that this is a key responsibility of the SRO.
PPE plans
This section should set out the expected timing(s) for PPE arrangements.
These should be incorporated in the project management plans, with a
named individual responsible for their execution.
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the project management arrangements

the change management arrangements
the benefits realisation arrangements, including an attached benefits
register
the risk management arrangements, including an attached risk
register
the post project evaluation arrangements.
Output of step 7
The first draft of the management case has now been completed, bearing in
mind that proposals for contract management have been addressed within
the commercial case at this point in time.
The OBC has now been completed and the bulk of the business case
preparation work undertaken.
A Gateway 2 or Health Check 2 for the procurement strategy stage should
now be considered for the project, prior to the formal submission of the
OBC to the approving authority for agreement.
Outcomes from the OBC
The management board and, subject to the organisations delegated limit,
the approving authority, will now decide whether the project should move
on to the next stage procurement phase.
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Stage 3 Procurement
Phase 3: Preparing the Full Business Case (FBC)
Overview
The preparation of the Full Business Case (FBC) is a mandatory part of the
business case development process, which is completed following
procurement of the scheme but prior to contract signature in most public
sector organisations.
The purpose of the FBC is to:
identify the market place opportunity which offers optimum VFM

set out the negotiated commercial and contractual arrangements for
the deal
demonstrate that it is unequivocally affordable
put in place the detailed management arrangements for the
successful delivery of the scheme.
Two points should be noted:
first, if the OBC has been prepared in accordance with the guidance
set out earlier and the procurement run in accordance with accepted
and established best practice, much of the work involved in
developing the FBC will simply focus on updating the OBC and
documenting the outcomes of the procurement rather than starting
from scratch
second, in some instances the FBC is still completed prior to the
commencement of the procurement and is, in effect, a second
(updated) version of the OBC. In such situations, the business case
still requires updating post procurement, as discussed. In these
situations, it is often referred to as the final (rather than full)
business case.

Introduction
This step involves revisiting the case for change made in the OBC; making
any necessary adjustments to the Public Sector Comparator (PSC); and
presenting the outcomes of the formal procurement process.
The main actions are set out below:
Stages
Phase 3
procurement
Development Process
Preparing the Full Business Case (FBC)
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Deliverables
Step 8
Procuring the VFM solution
Action 25
Action 26
Action 27
Revisit the case for change

Revisit the OBC options, including the PSC
Detail procurement process and evaluation of best
and final offers (BAFOs) (in s)
Economic
case
Action 25: revisit the case for change

This action revisits the rationale for the investment made in strategic case,
since some aspects of the case for change may have altered since the OBC
was approved, due to evolving business needs, service changes and the
passage of time.
Updating the strategic case
The same structure should be used as for the OBC.
The minimum requirement at this stage is to note within the FBC that the
case for investment remains as set out in the OBC; and that the resultant
scope and underlying assumptions have not altered.
However, some changes are likely. These should be recorded in full
particularly with reference to:
the strategic context for the scheme

the agreed investment objectives
business needs
the earlier scope and service requirements
the benefits
the risks
the dependencies
the constraints.
If the changes are major, the effects may require following-up throughout
the entire case. Otherwise, this part of the case should confirm the views
expressed at the OBC stage.
Clear support from the organisations commissioners and other key
stakeholders must be forthcoming at this stage see OBC guidance for
details of what this should cover.
Action 26: revisit the OBC options, including the public sector
comparator
This action is concerned with revisiting the OBC economic case and updating
the outline PSC (or the reference project).
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Revisiting the OBC options

Even if the strategic drivers for the project have not changed sufficiently to
make alterations to the preferred option necessary, the FBC must
demonstrate that the conclusions of the economic appraisal in the OBC
remain valid. The analysis from the OBC stage should be updated and
presented in the FBC.
Since approval of the OBC, new information affecting the ranking of the
options may have become available. For example:
the relative rankings may have changed as a result of supplier side

prices and other costs
the expected benefits of the OBC preferred option may be lower, or
the anticipated benefits of another option higher, which may change
the previous ranking of the options
the level of uncertainty in a high risk option may have reduced
making it more attractive
changes within the strategic context, and consequently to the deal,
may have led to significant changes in the preferred option.
If any of the key assumptions have altered, the FBC must demonstrate that
the recommended option following procurement continues to:
offer better VFM than the do nothing or do minimum options, so

that the case for change and procurement remains robust
offer better VFM than the other available options, including the
original preferred option, on the basis of service providers offerings.
Revisiting the procurement method

The FBC must also demonstrate that the project is still being procured by
the most appropriate method.
At the OBC stage different methods of funding and procurement were
examined. If the OBC considered that a form of private finance was
deliverable and potentially offered better VFM than conventional funding, a
privately financed option will have been pursued. At the FBC stage, private
finance offers from service providers must be compared to the outline PSC
taken forward as the preferred option at the OBC stage and to the do
minimum.
The principles of the economic appraisal are the same as those used to
identify the preferred option at the OBC stage.
The Public Sector Comparator
The PSC will need refining in the light of knowledge gained from the
procurement, so as to enable a like for like comparison of the cost of
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providing services in-house with the service providers solutions on an

outsourced, or privately financed basis. Henceforth, it is no longer referred
to as the outline PSC or reference project, but as the PSC.
The revisions to the PSC should not mimic any design, engineering or
operational attributes offered by service providers during the procurement
phase; but rather be adjusted to ensure that the scope of the outputs
required remains consistent.
It should not be necessary to adjust the do minimum option at this stage.
Risk adjustment
The minimum requirement at this stage is to revisit the cost of risk
retained under the outline PSC in the economic case of the OBC. This should
also be done for the risk values for the do nothing, status quo or do
minimum options, depending on which was carried forward as the
benchmark for VFM in the short-listed options appraisal (see step 4).
If these options were not risk quantified at OBC stage, but simply adjusted
to reflect optimism bias, the associated risks should now be identified and
quantified in full, as shown at step 4.
The aim at FBC is to reduce the level of optimism bias to the absolute
minimum. This is generally advised to be in the order of 2% for a standard
capital scheme at FBC stage see the earlier section on optimism bias (step
4, action 13).
Action 27: detail the procurement process and the evaluation of best
and final offers (BAFOs)
This action is concerned with updating the economic case to record a full
summary of the procurement process. This will include the resultant
selection of service providers (including the preferred bidder if
appointed); and the formal appraisal of their proposals, leading to the
selection of the preferred and recommended choice.
The procurement process
The content of this section should reflect the procurement strategy, route
and evaluation criteria set out in the OBC. Any changes should be explained.
It should list the service providers who expressed interest at the prequalification stage and the reasons for their rejection, where applicable. It
should also record the reasons for carrying forward and rejecting potential
service providers from the long list to the short list stage.
The evaluation of best and final offers (BAFOs)
The basis on which the potential service providers (the short list) were
selected and discarded at BAFO stage should be recorded.
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The selection of the preferred service provider

The basis on which the preferred bidder (if applicable) was selected should
be recorded, together with any arrangements for the ongoing attainment of
VFM.
FBC economic appraisals
The economic appraisals must be prepared in accordance with the
principles outlined at the OBC stage for:
each of the potential service providers offers at BAFO stage

the PSC (if applicable)
any in-house options
the do nothing or do minimum whichever has been adopted as
the benchmark for VFM.
Importantly, in addition to service providers costs, any attributable costs

falling to the organisation or any other public sector organisation must be
accounted for and the full cost shown for each option over the contract
period and life span of the investment.
Taking into account any adjustments made as a result of the earlier action
26, the non-financial benefits and the non-financial risks should be assessed
for each of the above options, and subject to sensitivity analysis, as
prescribed at the OBC stage. The resultant preferred choice should be
recommended for the approval of management in the FBC.
Post FBC approval prior to contract signature
Finally, the FBC must be re-submitted for re-approval if the costs or
benefits vary by more than 10% post FBC approval, or if the contract terms,
for whatever reason, vary significantly from those agreed.
any alterations to the strategic context and the case for change
the entire procurement process and service providers offers
how the selection of the preferred service provider was made on the
basis of an updated PSC (if applicable) and the investment appraisals,
including the benchmark for VFM, using HM Treasury Green Book
rules.
Output of step 8
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The strategic and economic cases have now been revisited, updated and
completed in respect of the FBC.
Introduction
The purpose of this step is to explain the negotiated deal and the financial
consequences to the organisation post contract. The main actions are set
out below:
Stages
Phase 3
procurement
Step 8
Development Process
Deliverables
Procuring the VFM Solution
Economic case
Step 9
Contracting for the deal
Commercial
case
Action 28
Set out the negotiated deal and contractual

arrangements
Action 29
Set out the financial implications of the deal
Financial case
Action 28: set out the negotiated deal and contractual arrangements
This action provides a detailed overview of the deal that has been
negotiated between the public sector organisation and the preferred choice
of service provider arising as a consequence of the procurement and FBC
economic appraisal. In essence, this is the commercial transaction that
management and the approving authority are being requested to sign-up to.
Content
The standard headings for the commercial case should be used to explain:
the service streams and outputs which are being contracted for
the implementation timescales which have been agreed for their
delivery
the allocation of risk negotiated between the public sector
organisation and preferred service provider
the underpinning method of payment for these services and outputs,
including the premiums for risk transfer
the type of contract used and the key contractual issues. A copy of
the proposed contract should be attached to the FBC, together with a
copy of the published OJEU notice. In the case of PPP (PFI)
98
procurements, the contract form should be compliant with HM

Treasury standards
the accountancy treatment of the negotiated deal, with confirmation
from the organisations external auditors, as appropriate
a detailed explanation of any personnel implications (for example,
TUPE) and how they are being managed.
Action 29: set out the financial implications of the deal

The purpose of this action is to explain in detail the financial implications to
the organisation of the negotiated deal.
Content
The standard headings for the financial case should be used to explain:
how the charges for the preferred service providers offer have been
modelled, including the resultant benefits
the capital and revenue implications of the resultant deal, including
any financial costs falling to the organisation
the net effect on the organisations charges (prices) if any
the impact on the organisations income and expenditure account and
balance sheet duly confirmed by the external auditor
the overall affordability and funding arrangements for the deal,
including (written) confirmation from the organisations
commissioners and other key stakeholders and any contingency
arrangements for over spends.

There should now be a clear understanding of the financial implications of
the proposed deal, both in terms of the organisations contractual
obligations and associated spend in support of the required services.
Output of step 9
The commercial and financial cases have now been revisited, updated and
completed in respect of the FBC.
Introduction
The main actions within this step are as follows:
Stages
Phase 3
procurement
Development Process
99
Deliverables
Step 8
Economic case
Step 9
Contracting for the Deal
Step 10
Ensuring successful delivery
Commercial
case
Management
case
Action 30
Finalise project management arrangements and

plans
Finalise change management arrangements and
plans
Finalise benefits realisation arrangements and
plans
Finalise risk management arrangements and
plans
Finalise contract management arrangements and
plans
Finalise post project evaluation arrangements
and plans
Action 31
Action 32
Action 33
Action 34
Action 35
Output:
Outcome:
Review Point:
Full Business Case

Recommended service provider and solution
Gateway 3 (investment decision)
Action 30: finalise project management arrangements and plans

This action revisits and updates the project management arrangements
shown in the OBC. The focus now shifts from the procurement phase to the
detailed arrangements in support of the design, build, and implementation
phases. Importantly, any necessary arrangements for the operational phase
of the project (post implementation) should not be overlooked, including
post project evaluation (PPE).
Content
The project management strategy should be revisited and updated, as
required.
The existing framework (project structure, reporting lines, roles and
responsibilities) should be shown, together with named individuals, any
vacancies and plans for any future changes.
The latest version of the project plan should be attached to the FBC. This
must reflect the implementation timescales agreed with the service
provider for the delivery of the negotiated services and be signed off by the
stakeholders and customers (end users) for the services.
100
Action 31: finalise change management arrangements and plans

This action revisits and updates the change management arrangements
shown in the OBC.
Content
The change management strategy should be revisited and updated, as
required.
vacancies and any plans for future changes.
The latest version of the change management plan should be attached to
the FBC. This must reflect the specific training and developmental needs of
key groups of personnel and any required communication arrangements. It
should be signed off by the stakeholders for the services and indicate
customer (end-user) involvement.
Action 32: finalise benefits realisation arrangements and plans
This action revisits and updates the benefits realisation arrangements shown
in the OBC.
Content
The strategy for the realisation of benefits during the key phases of the
project should be revisited and re-affirmed within the FBC.
The benefits register
The organisations plan for the ongoing management and delivery of
benefits should be encapsulated within the benefits register, which must be
completed in full and attached to the FBC. It should cover all the benefits
financial, non-financial and qualitative identified during the
implementation and operational phases of the project.
The owner of the benefits register should be named and his/ her reporting
line(s) identified to the senior responsible owner (SRO) who is ultimately
responsible for their delivery. It should also be confirmed that the benefits
register will be reviewed regularly and form part of the standing agenda at
all future project management board meetings.
Action 33: finalise risk management arrangements and plans
101
This action revisits and updates the risk management arrangements shown in
the OBC.
Content
The strategy for the management of risks during the key phases of the
project should be revisited and re-affirmed within the FBC.
The risk register
The organisations plan for the ongoing mitigation and management of risk
should be encapsulated within the risk register, which must be completed in
full and attached to the FBC. The register should cover all the business and
service risks identified during the design, build, implementation,
operational and re-procurement phase (if applicable) of the project.
The owner of the risk register should be named and his/ her reporting
line(s) identified. It should also be confirmed that the risk register will be
reviewed regularly and form part of the standing agenda at all future
project management board and/or risk management board meetings.
Contingency plan
Finally, the organisation should provide details of its contingency plan(s) in
the event of the non-delivery of the contracted services to the required
level of performance and availability at some unspecified future point in
time.
Action 34: finalise contract management arrangements and plans
This action considers both the formal and informal arrangements which
need to be in place to successfully manage the contract change.
Contract change
The more mundane contract management arrangements will have been
covered in the contract and indicated in the commercial case (see
contractual arrangements). These largely take care of the day-to-day
management of the service performance; availability; minor changes; the
escalation procedure for difficulties etc.
However, over the life span of the service contract it is likely that there will
be some significant changes given that it is in the nature of an organisation
to change, particularly if the organisation is a successful one. (In fact the
most successful organisations are those which adapt to changing
circumstances; or in anticipation of changing circumstances).
102
In accordance, with the partnering principle, the organisation should

consider its strategy for managing future, as yet unknown, contractual
change. Prevailing best practice suggests regular one-to-one meetings
between senior managers in both the customer and supplier organisation
and dealing with change within the context of a shared vision. This should
help to manage uncertainty on both counts and to reduce eventual cost.
The organisation should consider who will adopt this role over the life span
of the contract and plan accordingly. Any arrangements should be noted in
the FBC.
Action 35: finalise post project evaluation arrangements and plans
This action revisits and updates the post project evaluation arrangements
shown in the OBC.
Content
The FBC should record:
the arrangements for future OGC Gateway Reviews and organisational

Health Checks (if applicable) at Gate 3 (investment decision); Gate 4
(go live/ readiness for service) and Gate 5 (benefits realisation).
Ideally, Gate 3 should take place prior to the formal submission of
the FBC to the approving authority
the arrangements for PPE. First, the project evaluation, which should
be undertaken as soon as possible after the implementation of the
service to capture lessons learnt. Second the arrangements for
reviewing how well the service is running and delivering its
anticipated benefits, typically within 6 to 12 months after the
commencement of live running, and periodically thereafter
depending upon benefits delivery.
The arrangements for OGC Gateways / Health Checks and PPE should be
included in the project management plan.
There should now be a precise understanding of:
how the project will be managed

how change within the organisation will be implemented
how the benefits will be realised
how the business and service risks will be mitigated and managed
how major contract change will be handled over the longer term
how the project will be reviewed periodically
what the contingency plans are in the event of service failure.
103
Output of step 10
The management case has now been revisited, updated and completed in
respect of the FBC.
The FBC has now been completed. A Gateway 3 or Health Check 3 for the
investment decision point should now be considered for the project, prior to
the formal submission of the FBC to the approving authority for agreement.
Outcome from the FBC
All parties should now be content for the project to proceed to contract
signature, providing the above work has been completed satisfactorily and
the resultant scheme is affordable.
Finally, the FBC must be re-submitted for re-approval if the costs or
benefits vary by more than 5% (capital value) or 10% (revenue value) post
FBC approval, or the contract terms, for whatever reason, vary significantly
from those agreed.
104
9: The use of workshops for the development of the business case

Introduction
Experience demonstrates that the business case is best developed through a number of workshops involving key stakeholders,
customers and users, at the critical phases of its development. This adds immeasurably to the robustness of the case and,
consequently, to the approval and successful delivery of the scheme.
The number of workshops required will depend on the complexity of the project. In most instances they are required to closeoff the following aspects:
1.
2.
3.
4.
5.
6.
Developing the case for change

Assessing the options
Developing the reference project/ outline Public Sector Comparator (PSC)
Developing the deal
Determining the delivery arrangements
Assessing the potential service providers and solutions.
Workshop 6 is generally undertaken as part of the procurement process, in conjunction with the organisations procurement
department and so is not included in the detail that follows.
Workshop
Objectives
Workshop 1:
Determining the
case for change
and options for
service delivery
(SOC Stage)
Workshop 2:
Assessing the
options
(SOC/OBC stage)
Key participants
To define and agree business

needs, potential scope and
investment objectives
To define and agree desired
outcomes and service outputs
To define and agree the CSFs and
benefit criteria for assessing the
options
To identify the potential options
for service delivery
To sift the long list and generate

the short list
To identify and assess the
potential costs, benefits and risks
associated with the short-listed
options
106
Outputs
Senior Responsible
Owner
Board members
Programme director
Project manager
External stakeholders
or commissioners
Customer and/or user
representatives
Technical adviser
Financial adviser
Facilitator
or commissioners
Director of finance
Economic adviser
representatives
Project manager
Facilitator
SMART investment
objectives
Business needs and
potential scope
CSFs and benefits
criteria
Long list of options
Fundamentals of the
SOC
with preliminary
assessment
Outline benefits
realisation plan
Inputs for economic
appraisal
Workshop
Workshop 3:
Developing the
reference project/
outline PSC
Objectives
Key participants
To develop the PSC

To address all relevant issues,
including risks, affordability and
implementation
(OBC stage)
Workshop 4:
Developing the
deal
(OBC stage)
To develop the service

specification
To develop the apportionment of
risk and underpinning payment
mechanisms
To develop the proposed contract
Workshop 5:
Successful delivery
arrangements
To develop the procurement

strategy
To develop the project plan
To develop supporting strategies
(for change management and
107
Outputs
or commissioners
Director of finance
Economic adviser
representatives
Project manager
Facilitator
or commissioners
Director of finance
Economic adviser
representatives
Project manager
Facilitator
or commissioners
Director of finance
Economic adviser
Preliminary PSC with

indicative costs
Fundamentals of the
economic and financial
cases
Preliminary risk
allocation matrix (RAM)
Potential deal
Fundamentals of the
commercial case
Procurement strategy
Management and
delivery arrangements
Post project evaluation
arrangements
(OBC stage)
contract management etc)
108
representatives
Project manager
Facilitator
10. Common causes of project failure and their remedies.

Introduction
The following common causes of project failure together with questions to
be answered in terms of their mitigation have been identified by the
National Audit Office and the Office of Government Commerce.
If any of the answers are unsatisfactory, the scheme should not be
permitted to proceed to the next stage until the necessary assurances have
been obtained.
It is recommended that these issues should be addressed as early as possible
and certainly no later than at the following stage in the development of the
business case.
Common cause of
project failure
1. Lack of clear
links between
the project and
the
organisations
key strategic
priorities,
including agreed
measures of
success
Stage
SOC
Questions to be answered in full at each

stage and revisited thereafter
OBC
Do we know how the priority of this

project compares and aligns with
our other delivery and operational
activities?
Have we defined the critical
success factors (CSFs) for the
project?
Have the CSFs been agreed with
the key stakeholders?
Is the project founded on realistic
timescales taking into account any
statutory lead times, and showing
critical dependencies such that any
delays can be handled?
Are the lessons learnt from
relevant projects being applied?
Has an analysis been undertaken of
the effects of any slippage in time,
cost, scope or quality? In the event
of a problem/conflict at least one
must be sacrificed.
FBC
2. Lack of clear
senior
management and
ministerial
ownership and
leadership
SOC
OBC
FBC
110
Have the CSFs been agreed with

the service provider(s)?
Do we have a clear project plan
that covers the full period of the
planned delivery and all business
change required, and indicates the
means of benefits realisation?
Does the project management
team have a clear view of the
inter-dependencies between
projects, the benefits, and the
criteria against which success will
be judged?
If the project traverses
organisational boundaries are there
clear governance arrangements to
ensure sustainable alignment with
the business objectives of all
organisations involved?
Are all proposed commitments and
announcements first checked for
delivery implications?
Does the Senior Responsible Owner
(SRO) have a suitable track record
of delivery? Where necessary, is it
being optimised through
development and training?
Are decisions taken early on,
decisively and adhered to, in order
to facilitate successful delivery?
Does the project have the
necessary approval to proceed from
its nominated Minister either
directly or through delegated
authority to a designated SRO?
Does the SRO have the ability,
responsibility and authority to
ensure that the business change
and business benefits are
delivered?
3. Lack of effective
engagement with
stakeholders
SOC
OBC
4. Lack of skills and

proven approach
to project
management and
risk management
Have we identified the right

stakeholders?
Have we, as intelligent customers,
identified the rationale for doing so
(for example, the why, the what,
the who, the where, the when and
the how)?
Have we secured a common
understanding and agreement of
stakeholders requirements?
Does the business case take
account of the views of
stakeholders, including
customers/users?
Do we understand how we will
manage stakeholders (for example,
ensure buy-in, overcome resistance
to change, allocate risk to the
party best able to manage it)?
Has sufficient account been taken
of the subsisting organisational
culture?
FBC
Whilst ensuring that there is clear

accountability, how can we resolve
any conflicting priorities?
SOC
Is there a skilled and experienced

project team with clearly defined
roles and responsibilities? If not, is
there access to expertise, which
can benefit those fulfilling the
requisite roles?
111
OBC
5. Too little
attention to
breaking
development and
implementation
into manageable
steps
Are the major risks identified,

weighted and treated by the SRO,
the director, and project manager
and/or the project team?
Has sufficient resource, financial
and otherwise, been allocated to
the project, including an allowance
for risk?
Do we have adequate approaches
for estimating, monitoring and
controlling the total amount of
expenditure on projects?
Are the governance arrangements
robust enough to ensure that bad
news is not filtered out of progress
reports to senior managers?
If external consultants are used,
are they accountable and
committed to help ensure the
successful and timely delivery?
FBC
Do we have effective systems for

measuring and tracking the
realisation of benefits in the
business case?
OBC
Has the approach been tested to

ensure that it is not big bang (for
example, IT enabled projects)?
Has sufficient time been built in to
allow for planning applications in
property and construction projects
etc?
Have we done our best to keep
delivery timescales short so that
change during development is
avoided?
Have enough review points been
built in so that the project can be
stopped if changing circumstances
mean that the business benefits are
no longer achievable or no longer
represent value for money (VFM)?
FBC
112
Is there a business continuity plan

in the event of the project
delivering late or failing to deliver
at all?
6. Evaluation of
proposals driven
by initial price
rather than longterm value for
money
(especially
securing delivery
of business
benefits)
OBC
7. Lack of
OBC
understanding of,
and contact with
the supply
industry at senior
levels in the
organisation
FBC
113
Is the evaluation based on wholelife VFM, taking account of capital,

maintenance and service costs?
Do we have a proposed evaluation
approach that allows us to balance
financial factors against quality and
security of delivery?
Does the evaluation approach take
account of business criticality and
affordability?
Is the evaluation approach business
driven?
Have we tested that the supply
industry understands our approach
and agrees that it is achievable?
Have we checked that the project
will attract sufficient competitive
interest?
Are senior management sufficiently
engaged with the industry to be
able to assess supply side risks?
Do we have a clear strategy for
engaging with the industry or are
we making sourcing decisions on a
piecemeal basis?
Are the processes in place to
ensure that all parties have a clear
understanding of their roles and
responsibilities, and a shared
understanding of desired outcomes,
key terms and deadlines?
Do we understand the dynamics of
the industry to determine whether
our acquisition requirements can
be met, given potentially
competing pressures in other
sectors of the economy?
Have we asked suppliers to state
any assumptions that they are
making against their proposals?
8. Lack of effective
project team
integration
between clients,
the supplier
team and the
supply chain
OBC
FBC
114
Has a market evaluation been

undertaken to test market
responsiveness to the requirements
being sought?
Are the procurement routes that
allow integration of the project
team being used?
Is there early supplier involvement
to help determine and validate
what outputs and outcomes are
being sought for the project?
Has a shared risk register been
established?
Have arrangements for sharing
efficiency gains throughout the
supply team been established?
10. Business case content and structure

A business case is developed over time, in conjunction with the scoping, planning and procurement phases of the solution.
There are three key stages in its development, which constitute milestones when approval may be required to proceed further.
During its infancy, the key deliverable is the SOC; in its adolescence, the OBC; and finally, when the solution has reached
maturity, the FBC.
This document provides a template from which to develop your case in each phase.
Outline Business Case (OBC)
Full Business Case (FBC)
Phase 1: initial scoping
Phase 2: planning
Phase 3: selection of solution/

procurement
Primary purpose:
1. to establish the case for change
and strategic fit with other
programmes
2. to indicate the way forward in
terms of a preferred way forward.
Prior to OJEC (pre-procurement)

Primary purpose:
3. to identify a preferred option
4. to assess potential VFM,
affordability and achievability.
Following competition (precontract)

Primary purpose:
5. to select the service solution
6. to finalise post procurement
arrangements.
Structure and content
Executive summary
Executive summary
Executive summary
Document structure
Document structure
Document structure
The Strategic Case
The Strategic Case
The Strategic Case
Strategic context
Strategic context
Strategic context
Snapshot of the organisation: purpose,
structure and environment etc.
Update as required
Update as required
Business strategy and aims

Existing and future business plans,
including any relevant national
initiatives and stakeholders/ customers
for services

Update as required

Update as required
Other organisational strategies for

example, IS/IT; HR
Existing and future plans
Other organisational strategies

Update as required
Other organisational strategies

Update as required
Strategic needs
Strategic needs
Strategic needs
Key objectives for proposed
investments
Investment objectives ranked in order Update as required
of priority and made SMART
Existing arrangements (if any)

Snapshot of current service
arrangements

Update as required

Update as required
Business needs current and future
116
Service gaps to be filled
Update as required
Update as required
Potential scope and service

requirements
Business scope and high level service
outputs
Desired scope and service

Scope and service requirements
requirements
Update as required
Detailed description of business scope
and high level service
outputs/requirements
Benefits criteria
Main benefits by key stakeholder
groups
Benefits criteria
Main benefits by key stakeholder
groups ranked in order of
importance and/or weight
Benefits criteria
Update as required
Strategic risks
Key business, service and external
risks, together with outline mitigation
and management arrangements
Strategic risks
Update as required, including specific
proposals for mitigation and
management
Strategic risks
Update as required
Constraints and dependencies

Internal and external

Update as required

Update as required
The Economic Case
The Economic Case
The Economic Case
Critical success factors (CSFs)

Weighted and ranked in order of
importance

Update as required

Update as required
Main business options

Long list for SWOT analysis including

Revisit and update, as required,

Summary of OBC options
117
do nothing or do minimum options.
including options not identified

earlier
Preferred way forward

Conclusion from initial assessment
using options framework

Revisit and update, as required

Summary of OBC conclusion
Recommended options for OBC
analysis; including do nothing or do
minimum and reference project (if
applicable)
Also includes
Outline commercial case
High level assessment of possible deal
and supply-side interest
Detailed description of short-listed
options including do nothing or do
minimum and outline Public Sector
Comparator (PSC)
Detailed description of short-listed
options including do nothing or do
minimum, the PSC, the procurement
process and service providers' BAFOs
NPC/NPV findings
Results of economic appraisals for
each option, including cost of risk
retained
NPC/NPV findings
Results of economic appraisals for
each option, including cost of risk
retained
Outline financial case

High level assessment of affordability
Benefits appraisal
Results of ranking, weighting and
scoring the qualitative benefits for
each short-listed option
Benefits appraisal
Results of ranking, weighting and
scoring the qualitative benefits for
each short-listed option, including
service providers' solutions
Outline project management case

High level assessment of achievability
Risk assessment
Full assessment of risks retained
under each short-listed option,
including costing of DBFO risks
Risk assessment
Full assessment of risks retained
under each short-listed option,
including costing of DBFO risks
118
Recommended way forward
Results of sensitivity analysis
undertaken for short-listed options
Results of sensitivity analysis
undertaken for short-listed options
Preferred option
Preferred option
Recommended option following above Recommended solution following
analysis
procurement
The Commercial Case
The Commercial Case
For possible deal:

Potential scope and services
Potential risk allocation
Potential charging mechanisms
Potential key contractual
arrangements
Potential personnel implications
Potential implementation timescales
Potential accountancy treatment
For recommended deal:

Agreed scope and services
Agreed risk allocation
Agreed charging mechanisms
Agreed key contractual arrangements
Agreed personnel implications
Agreed implementation timescales
Agreed accountancy treatment
The Financial Case
The Financial Case
For possible deal:

Potential capital requirement
Potential net effect on prices
Potential impact on balance sheet
Potential impact on income and
expenditure account
For recommended deal:

Capital requirement
Net effect on prices
Impact on balance sheet
Impact on income and expenditure
account
119
Appendices
1. Strategic plans/ organisational/
business strategies (as appropriate)
2. Strategic business plans/ SOP
3. Risk potential assessment
Overall affordability
Overall affordability
The Management Case
The Management Case
Procurement strategy
Intended method of procurement,
including use of:
- EC/GATT regulations
- evaluation criteria
- selection of preferred bidder
The results of the procurement

process are assessed within the
economic case at this stage
Outline arrangements for:
Agreed Arrangements for:
Project management
Change management
Benefits realisation
Risk management
Project management
Change management
Benefits realisation
Risk management
Contract management
Contingency plans
Appendices
1. Economic appraisals
Appendices
1. Economic appraisals
2. Financial appraisals
3. Non-financials risks and benefits
registers
5. Letter of commissioner/
2. Financial appraisals
3. Non-financials risks and benefits
registers
5. Letter of commissioner/
120
stakeholder support
6. Draft OJEU notice (where
applicable)
7. SOP/ strategic business plans
121
stakeholder support
6. Proposed contract and OJEU notice
(where applicable)
7. SOP/ strategic business plans
8. Agreed project/ change
management plans
11. The systematic approach to the preparation of the business case:

overview of steps and actions for SOP, SOC, OBC and FBC phases.
Stages
Development Process
Phase 0
Step 1 /
action 1
Determining the strategic context

Ascertain strategic fit
Output
Outcome
Review point

Strategic fit
Gateway 0 strategic fit
Phase 1
scoping
Preparing the Strategic Outline Case (SOC)
Step 2
Action 2
Action 3

Agree strategic context
Determine investment objectives, existing
arrangements and business needs
Determine potential business scope and service
requirements
Determine benefits, risks, constraints and
dependencies
Action 4
Action 5
Step 3
Exploring the preferred way forward
Action 6
Action 7
Action 8
Agree critical success factors (CSFs)

Determine long list options and SWOT analysis
Recommended preferred way forward
Output
Outcome
Review point

Robust case for change
Gateway 1: business justification
Phase 2 Planning
Deliverables
Strategic
context
Strategic case
Economic
case part 1
Outline
commercial,
financial and
management
cases
Step 4
Determining value for money (VFM)
Action 9
Revisit SOC and determine short-list including

reference project (outline PSC)
Prepare the economic appraisals for short-listed
options
Undertake benefits appraisal
Undertake risk assessment/appraisal
Select preferred option and undertake sensitivity
analysis
Action 10
Action 11
Action 12
Action 13
Economic
case part 2
Step 5
Action 14
Action 15
Action 16
Action 17
Action 18
Determine procurement strategy

Determine service streams and required outputs
Outline potential risk apportionment
Outline potential payment mechanisms
Ascertain contractual issues and accountancy
treatment
Step 6
Financial case
Action 19

requirement
Prepare financial model and financial appraisals.
Step 7
Planning for successful delivery
Management
case
Action 20
Plan project management strategy, framework

and outline plans
Plan change management strategy, framework
and outline plans
Plan benefits realisation strategy, framework
and outline plans
Plan risk management strategy, framework and
outline plans
Plan post project evaluation strategy,
framework and outline plans
Action 21
Action 22
Action 23
Action 24
Output
Outcome
Review point
Outline Business Case

Planned procurement for VFM solution
Gateway 2: procurement strategy
123
Commercial
case
Phase 3
procurement
Step 8
Action 25
Action 26
Action 27
Revisit the case for change

Revisit the OBC options, including the PSC
Detail procurement process and evaluation of best
and final offers (BAFOs) (in s)
Step 9
Contracting for the deal
Action 28
Action 29
Set out the negotiated deal and contractual

arrangements
Set out the financial implications of the deal
Step 10
Ensuring successful delivery
Action 30
Finalise project management arrangements and

plans
Finalise change management arrangements and
plans
Finalise benefits realisation arrangements and
plans
Finalise risk management arrangements and plans
Finalise contract management arrangements and
plans
Finalise post project evaluation arrangements and
plans
Action 31
Action 32
Action 33
Action 34
Action 35
Output
Outcome
Review point
Full Business Case

Recommended service provider and solution
Gateway 3 (investment decision)
124
Economic
case
Commercial
case
Financial case
Management
case
Glossary
Additionality
An impact arising from an intervention is

additional if it would not have occurred in the
absence of the intervention.
Affordability
An assessment of whether the proposals can be

paid for in terms of cash flows and resource costs
see financial case
Appraisal
The process of defining objectives, examining

options and weighing up the costs, benefits, risks
and uncertainties of those options before a
decision is made.
Assessments
Either an appraisal or an evaluation (or both).
Base case
The best estimate of how much a proposal will

cost in economic terms, including an allowance
for risk and optimism.
Business case
A management vehicle for scoping and planning

the proposal and documenting the outcome. Often
a requirement of the approval process.
Capital expenditure
Expenditure on durable assets such as land,

buildings and equipment.
Contingency
An allowance of cash or resources to cover

unforeseen circumstances.
Cost benefit analysis

(CBA)
Analysis which quantifies in monetary terms as

many of the costs of a proposal as feasible
(financials), including items for which the market
does not provide a satisfactory measure of
economic value (non-financials).
Cost effectiveness
analysis (CEA)
Analysis that compares the cost of alternative

ways of producing the same or similar outputs.
Discounting
A method used to convert future costs or benefits

to present values using a discount rate.
Discounted cash flow

(DCF)
A technique for appraising investments. It reflects

the principle that the value to an investor of a
sum of money depends on when it is received.
Discount rate
The annual percentage rate at which the present

value of a , or other unit of account, is assumed
125
to fall away through time.

Do minimum option
An option where the public sector takes the

minimum amount of action necessary.
Do nothing option
The cost of the status quo, often used as a

benchmark for VFM.
Economic appraisal
See appraisal. This specifically takes into account

the economic costs. Also used as a general term to
cover cost benefit analysis (CBA).
Economy
A measure of the extent to which the costs

associated with a project, programme or policy
are reduced.
Effectiveness
A measure of the extent to which a project,

programme or policy achieves its desired
outcomes/outputs.
Efficiency
A measure of the extent to which a project,

programme or policys associated throughputs are
increased.
Equivalent annual cost

(EAC)
The constant annual costs which are equivalent

(same present value) to a projects actual costs.
Evaluation
Retrospective analysis of a project, programme or

policy to assess how successful (or otherwise) it
has been, and to learn lessons for future
improvement.
Expected value
The weighted average of all possible values of a

variable, where the weights are the probabilities
(in %s).
Five case model
A systematic framework for the development and

the presentation of the business case over time
(SOC, OBC and FBC).
Internal rate of return
The discount rate that would give a project a

present value of zero.
Market value
The price at which a commodity can be brought or

sold, determined by the interaction of buyers and
sellers in a market.
Monte Carlo analysis
A technique that allows assessment of the

consequences of simultaneous uncertainty about
126
key inputs, taking account of correlation between

these inputs.
Net present cost (NPC)
The discounted value of a stream of future costs.
Net present value

(NPV)
The discounted value of a stream of either future

costs or benefits. The NPV is used to describe the
difference between the present value of a stream
of costs (NPC) and a stream of benefits.
Opportunity cost
The value of the most valuable alternative uses or

the cost of something in terms of an opportunity
forgone.
Optimism bias
The demonstrated systematic tendency for

appraisers to be over-optimistic about key project
parameters, including capital costs, works
duration and benefits realisation.
Option appraisal
The process of defining objectives, examining

options and weighing up the costs, benefits, risks
and uncertainties of those options before a
decision is made.
Options framework
A systematic framework for the development of

options.
PFI
The Private Finance Initiative
PPP
Public private partnerships
Public Sector
Comparator (PSC)
A hypothetical risk-adjusted costing by the public

sector as a supplier to an output specification,
generally used in connection with a PFI
procurement exercise.
Required rate of
return
A target average rate of return for a pubic sector

trading body, usually expressed as a return on the
current cost value of total capital employed.
Risk
The likelihood (measured by its probability) that a

particular event will occur.
Analysis of the effects on an appraisal of varying

the projected values of important variables.
Switching values
The point at which the choice of the preferred

option would switch to another option due to any
uncertain costs and/ or benefits.
127
Transfer payment
A payment for which no goods or services are

received in return.
Uncertainty
A scenario within which it is impossible to attach

probabilities to the range of possible outcomes.
Weighting and scoring
An appraisal technique for the assessment of

qualitative costs, risks and benefits.
Willingness to pay
The amount that someone is willing to receive or

accept to give up a good or service.
128
Bibliography
Making Sense of Public Sector Investments: the five case model in decision
making by Courtney Smith and Joe Flanagan (ISBN 1 85775 432 8)
The Department of Health Capital Investment Manual: Business Case Guide
(ISBN 07 480 3011 5) www.dh.gov.uk
HM Treasury Green Book: Appraisal and Evaluation in Central Government,
Treasury Guidance (London: TSO). See www.greenbook.treasury.gov.uk
Supplementary Green Book Guidance: Optimism Bias (2003).
IM&T Business Case Guidance the Five Case Model OBC and FBC, the
Department of Health Consultation Draft (October 2001). Author: Susan
Peak.
Common Causes of Project Failure, Office of Government Commerce (OGC)
(Ref: CP0015/01/05)
The Information Systems Guides: Management and Planning Set. Central
Computer & Telecommunication Agency (CCTA). Strategic Planning for
information Systems (A1). Authors: Gareth Bunn, Callum Bartlett, David
McLean. ISBN: 0 471 925551
HM Treasurys Quantitative Assessment User Guide, August 2004: www.hmtreasury.gov.uk
Office of Government Commerce: www.ogc.gov.uk
129
Biographies of the Authors

Joe Flanagan
Joe Flanagan is currently the Director of Investment Policy and Appraisal for
the NHS in Wales with lead responsibility for the scrutiny of investments.
Prior to this he was Commercial Director at the NHS Information Authority,
with responsibility for the procurement of national solutions.
Joe joined HM Treasury in 1972 and has been passionate about improving
the scoping, planning and procurement of public sector investments ever
since. Whilst Head of the Investment Proposal Service in the Central
Computer Telecommunications Agency (CCTA, HM Treasury), he was lead
consultant on a wide range of programmes and projects within Government
Departments, where he helped to develop best practice and maximise Value
for Money (VFM).
He is the architect of the Five Case Model and the co-author of Making
Sense of Public Sector Investments: The Five case Model in Decision Making.
This book focuses on the business case and investment appraisal process
developed by Joe in the past twenty-five years.
Paul Nicholls, CPFA
Paul is the Director of Open Business Consulting Ltd. He has thirty years
experience working in the NHS and other parts of the public sector in
finance and general management. He qualified as an accountant in local
government working for 11 years in a variety of service areas including
education, police and social services. In 1985, he joined the NHS in Oxford
where he led a number of programmes including the development of NHS
Trusts and the Resource Management Initiative. In 1992, Paul moved to the
South West and in 1995 became Director of Performance and Finance and
Deputy Regional Director for the South West Regional Office of the
Department of Health. Following reorganisation he became Director of
Finance and Performance for a Strategic Health Authority before leaving in
2004 to form his own consultancy business. In recent years, Paul has
undertaken many assignments working with government departments, the
Welsh Assembly Government and the NHS on the development of new
approaches to the management of capital investment in the public sector.
130

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Public Sector Business Cases using the Five Case

This guidance provides a systematic and objective approach to all stages of

first economy to reduce the costs and timescales associated with

The potential benefits

Dr Christine Daws, Director of Finance at the Welsh Assembly

3. Who should read this publication?

the business case philosophy

It should, therefore, be read by key personnel involved in the development

Senior Responsible Owners (SROs), Programme Directors and Project

This guidance is provided in accordance with HM Treasurys Green Book (a

4. Why is the business case important?

are supported by a robust case for change that provides strategic

5. Overview of the business case development process

This phase maps onto OGC Gateway 1 business justification.

internal and external audit

6. Responsibility for producing the business case

7. A systematic approach to the development of the business case

other projects in the programme investment portfolio

Determining the strategic context

Strategies, programmes and projects

The business strategies, programmes and projects within an organisation

where are we now?

reviewing the strategies, programmes and portfolios of projects in

the projects have defined benefits and outputs

Further information on how to undertake a strategic review in the NHS is

revisit the strategic context of the investment

Checklist for step 1

they provide an early opportunity for the organisation and key

Step 2: making the case for change

Making the case for change

Determine benefits, risks, constraints and

Action 2: agree strategic context

the mission of the organisation

Much of this information may be gleaned from annual reports. However, it is

A robust case for change requires a thorough understanding of what the

be customer focused and distinguishable from the means of provision

It is also important that investment objectives are not so narrowly defined

provide further economies in the provision of an existing service

Procuring an asset or service, or putting in place a scheme is never an

Within the parameters of the scope determined by the projects investment

confirmation of the continued need for business operations, including

A useful technique for populating this section of the business case is to

What we are seeking to achieve

Action 4: determine potential business scope and key service

Action 5: determine benefits, risks, constraints and dependencies

cash releasing benefits (CRB)

financial but non-cash releasing benefits (non CRB)

The framework below gives an indication of the likely nature of benefits

The benefits both direct and indirect to the organisation should be

indicate the relative value, or weight, of each investment objective.

All categories will subsequently need evaluating.

These are the strategic risks which remain (100%)

These are the risks associated with the design,

These risks affect all organisations regardless of

What we are seeking to achieve

Checklist for step 2

clear SMART investment objectives for the project

Output for step 2

Making the case for change

Agree critical success factors (CSFs)

Strategic Outline Case (SOC)

Action 6: agree critical success factors for the investment